Monday, July 11, 2005
over reaction
Cnooc Chief Criticizes `Overreaction' to Offer --- Fu Says Unocal Bid Poses No Threat to U.S. Security; `I Just Have One Job'
By Peter S. Goodman The Washington Post
1,390 words
7 July 2005
The Asian Wall Street Journal
A1
English
(c) 2005 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here http://awsj.com.hk/factiva-ns
BEIJING -- The chairman of Cnooc Ltd., the Chinese energy firm embroiled in a thorny campaign to purchase U.S. oil company Unocal Corp., voiced dismay with what he called "overreaction" from Washington by those portraying the deal as a threat to fair trade and U.S. national security.
In an interview yesterday with at Cnooc's headquarters in Beijing, Chairman Fu Chengyu said critics of his company's bid for Unocal were guilty of viewing China through an outdated lens, failing to appreciate how economic reforms have forced Chinese companies to adopt market principles and focus on profitability.
"They don't understand what has happened in China in the last 20 years," Mr. Fu said. "Most of the concerns are related to politics and not the commercial side. I didn't expect that so many people would be so sensitive to this. We are following a system that was set up by Western leading companies, especially the United States. We are walking along a path that they paved, so we thought, `This is natural.'"
But Mr. Fu expressed confidence that Cnooc would eventually convince critics that its acquisition poses no menace. He said his company might consider raising its $18.5 billion bid if needed.
"Our board has made the decision that we have to win this bid," he said.
As Cnooc continues its pursuit of Unocal, the conflict has become symbolic of the struggle by the U.S. to adjust to the implications of China's growing force in the global economy. Since Cnooc last month made an unsolicited offer for Unocal, seeking to trump a bid from oil giant Chevron Corp., a vocal slice of the U.S. Congress has assailed the deal as a provocation in an already tense trade relationship between China and the U.S.
Some have warned that the takeover would hand a slice of the U.S. oil supply -- albeit a tiny one -- to a company owned by China's Communist Party-led government. Others have cast Cnooc's reach for Unocal as an example of how China's companies have an unfair advantage in their increasingly global quest for new markets, drawing on sweetheart credit from local banks and the bottomless largess of the state.
Last week, the U.S. House of Representatives overwhelmingly approved a resolution urging the administration of President George W. Bush to scrutinize the deal as a potential threat to national security.
Even within China, some analysts have said the deal is driven less by commercial interests and more by the government's desires to have Chinese energy companies secure new stocks in an era of ballooning oil consumption at home.
"Of course this deal is about China's energy security," said Shen Dingli, an international relations expert at Fudan University in Shanghai. "That's why the government created these companies: to go out and get oil for China."
Mr. Fu took pains to rebut such characterizations during the interview, pressing what has become Cnooc's mantra: His company's interest in Unocal is a commercial issue that has nothing to do with China's energy security and everything to do with boosting profits.
"I'm not a government leader," he said. "Nobody tells me how to run this company. We are in our own business. I just have one job, one responsibility, which is to make sure that I can continue to grow this company."
He called Unocal "a strategically perfect fit," noting that 70% of its energy reserves are in Asia, and many of them in Indonesia, where Cnooc is the largest offshore oil producer. Unocal boasts substantial natural-gas reserves, while Cnooc is keenly focused on developing liquid-natural-gas terminals that can serve industrial customers in booming coastal cities. Overall, capturing Unocal would double Cnooc's total energy reserves.
Mr. Fu dismissed concerns that his company might hoard energy for China's use, saying that if Cnooc closes the deal, Unocal will continue to serve its customers in the U.S. and Southeast Asia.
"I don't see any national-security issue to this," he said.
In an attempt to underscore that point, last week Cnooc filed for a review from the Committee on Foreign Investment in the United States, a panel that scrutinizes takeovers of U.S. companies by foreign firms.
Mr. Fu is widely seen as the driving force behind his company's pursuit of Unocal. He is touted here as part of China's new face -- a symbol of a once insular country turning outward, whose companies are thinking globally and operating with increasing independence from the state.
But that image is proving a tough sell as Cnooc seeks to mollify critics in Washington. Mr. Fu heads not only Cnooc Ltd. but also its fully state-owned parent company, China National Offshore Oil Corp., which holds 70% of Cnooc's shares. He owes those posts to appointments by the Communist Party, of which he is a member. Cnooc's parent is controlled directly by the State Administration for State-Owned Assets, the holding company for China's State Council, the functional equivalent to the cabinet.
Analysts say Mr. Fu is playing two conflicting roles at once. He is the head of a profitable company, whose shares trade publicly on stock markets in New York and Hong Kong, and whose shareholders demand profit. He is also answerable to a government that has grown increasingly keen to lock up new stocks of energy overseas by buying into oil and gas fields at whatever the cost.
"There is no way that Cnooc can make the decision to merge with Unocal without substantial government support and orchestration," said Li Weijian, an overseas energy expert at the Shanghai Institute for International Studies. "The oil industry is the most important industry for the Chinese government. Any projects within the industry have to meet the strict requirements of China's oil security strategy."
Those pointing to Cnooc's bid as a sign of unfair trade have focused on two issues -- the terms of finance and the purchase price, which analysts say is far higher than the market dictates. Cnooc has a market capitalization of $22 billion, yet it is offering $18.5 billion in cash for Unocal, aided by $7 billion in loans from its state-owned parent, with $2.5 billion of that interest-free. The bulk of the remainder will come via loans from the Industrial and Commercial Bank of China, a state-owned lender. Without generous, state-guided credit, Cnooc could never contemplate the deal, say analysts.
Mr. Fu said that under China's tight controls on capital, the deal requires central-government approval to shift such a large sum overseas. But he said the decisions by the state bank and Cnooc's parent to extend credit reflect only the commercial merits of the deal.
Ultimately, he said, Cnooc's purchase of Unocal would further the advance of private enterprise in China: If the deal goes through, Cnooc will issue more shares, diluting the government's ownership.
Cnooc made its own road much harder by waiting until U.S.-based Chevron had a deal in hand to offer its own bid, Mr. Fu acknowledged. Unocal shareholders are set to vote on Chevron's offer on Aug. 10. Chevron is using the furor in Washington to its advantage, seeking to persuade Unocal shareholders to take its lower bid by asserting that Cnooc's offer might not pass muster with U.S. regulators.
Mr. Fu said his company delayed action because his governing board opted to first study Unocal's holdings more intensively. He pointed at the timing itself as evidence that his company takes no orders from the government.
If it all leads to failure -- if Unocal shareholders conclude the risks are too great and go with Chevron, or if the Bush administration blocks a deal -- Mr. Fu said he would have to re-examine his basic understanding of free trade.
"I would suddenly find out that what Westerners taught us is not the way the West wants to go," he said.
---
Jason Cai and Eva Woo contributed to this article.
Document AWSJ000020050706e1770001m
By Peter S. Goodman The Washington Post
1,390 words
7 July 2005
The Asian Wall Street Journal
A1
English
(c) 2005 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here http://awsj.com.hk/factiva-ns
BEIJING -- The chairman of Cnooc Ltd., the Chinese energy firm embroiled in a thorny campaign to purchase U.S. oil company Unocal Corp., voiced dismay with what he called "overreaction" from Washington by those portraying the deal as a threat to fair trade and U.S. national security.
In an interview yesterday with at Cnooc's headquarters in Beijing, Chairman Fu Chengyu said critics of his company's bid for Unocal were guilty of viewing China through an outdated lens, failing to appreciate how economic reforms have forced Chinese companies to adopt market principles and focus on profitability.
"They don't understand what has happened in China in the last 20 years," Mr. Fu said. "Most of the concerns are related to politics and not the commercial side. I didn't expect that so many people would be so sensitive to this. We are following a system that was set up by Western leading companies, especially the United States. We are walking along a path that they paved, so we thought, `This is natural.'"
But Mr. Fu expressed confidence that Cnooc would eventually convince critics that its acquisition poses no menace. He said his company might consider raising its $18.5 billion bid if needed.
"Our board has made the decision that we have to win this bid," he said.
As Cnooc continues its pursuit of Unocal, the conflict has become symbolic of the struggle by the U.S. to adjust to the implications of China's growing force in the global economy. Since Cnooc last month made an unsolicited offer for Unocal, seeking to trump a bid from oil giant Chevron Corp., a vocal slice of the U.S. Congress has assailed the deal as a provocation in an already tense trade relationship between China and the U.S.
Some have warned that the takeover would hand a slice of the U.S. oil supply -- albeit a tiny one -- to a company owned by China's Communist Party-led government. Others have cast Cnooc's reach for Unocal as an example of how China's companies have an unfair advantage in their increasingly global quest for new markets, drawing on sweetheart credit from local banks and the bottomless largess of the state.
Last week, the U.S. House of Representatives overwhelmingly approved a resolution urging the administration of President George W. Bush to scrutinize the deal as a potential threat to national security.
Even within China, some analysts have said the deal is driven less by commercial interests and more by the government's desires to have Chinese energy companies secure new stocks in an era of ballooning oil consumption at home.
"Of course this deal is about China's energy security," said Shen Dingli, an international relations expert at Fudan University in Shanghai. "That's why the government created these companies: to go out and get oil for China."
Mr. Fu took pains to rebut such characterizations during the interview, pressing what has become Cnooc's mantra: His company's interest in Unocal is a commercial issue that has nothing to do with China's energy security and everything to do with boosting profits.
"I'm not a government leader," he said. "Nobody tells me how to run this company. We are in our own business. I just have one job, one responsibility, which is to make sure that I can continue to grow this company."
He called Unocal "a strategically perfect fit," noting that 70% of its energy reserves are in Asia, and many of them in Indonesia, where Cnooc is the largest offshore oil producer. Unocal boasts substantial natural-gas reserves, while Cnooc is keenly focused on developing liquid-natural-gas terminals that can serve industrial customers in booming coastal cities. Overall, capturing Unocal would double Cnooc's total energy reserves.
Mr. Fu dismissed concerns that his company might hoard energy for China's use, saying that if Cnooc closes the deal, Unocal will continue to serve its customers in the U.S. and Southeast Asia.
"I don't see any national-security issue to this," he said.
In an attempt to underscore that point, last week Cnooc filed for a review from the Committee on Foreign Investment in the United States, a panel that scrutinizes takeovers of U.S. companies by foreign firms.
Mr. Fu is widely seen as the driving force behind his company's pursuit of Unocal. He is touted here as part of China's new face -- a symbol of a once insular country turning outward, whose companies are thinking globally and operating with increasing independence from the state.
But that image is proving a tough sell as Cnooc seeks to mollify critics in Washington. Mr. Fu heads not only Cnooc Ltd. but also its fully state-owned parent company, China National Offshore Oil Corp., which holds 70% of Cnooc's shares. He owes those posts to appointments by the Communist Party, of which he is a member. Cnooc's parent is controlled directly by the State Administration for State-Owned Assets, the holding company for China's State Council, the functional equivalent to the cabinet.
Analysts say Mr. Fu is playing two conflicting roles at once. He is the head of a profitable company, whose shares trade publicly on stock markets in New York and Hong Kong, and whose shareholders demand profit. He is also answerable to a government that has grown increasingly keen to lock up new stocks of energy overseas by buying into oil and gas fields at whatever the cost.
"There is no way that Cnooc can make the decision to merge with Unocal without substantial government support and orchestration," said Li Weijian, an overseas energy expert at the Shanghai Institute for International Studies. "The oil industry is the most important industry for the Chinese government. Any projects within the industry have to meet the strict requirements of China's oil security strategy."
Those pointing to Cnooc's bid as a sign of unfair trade have focused on two issues -- the terms of finance and the purchase price, which analysts say is far higher than the market dictates. Cnooc has a market capitalization of $22 billion, yet it is offering $18.5 billion in cash for Unocal, aided by $7 billion in loans from its state-owned parent, with $2.5 billion of that interest-free. The bulk of the remainder will come via loans from the Industrial and Commercial Bank of China, a state-owned lender. Without generous, state-guided credit, Cnooc could never contemplate the deal, say analysts.
Mr. Fu said that under China's tight controls on capital, the deal requires central-government approval to shift such a large sum overseas. But he said the decisions by the state bank and Cnooc's parent to extend credit reflect only the commercial merits of the deal.
Ultimately, he said, Cnooc's purchase of Unocal would further the advance of private enterprise in China: If the deal goes through, Cnooc will issue more shares, diluting the government's ownership.
Cnooc made its own road much harder by waiting until U.S.-based Chevron had a deal in hand to offer its own bid, Mr. Fu acknowledged. Unocal shareholders are set to vote on Chevron's offer on Aug. 10. Chevron is using the furor in Washington to its advantage, seeking to persuade Unocal shareholders to take its lower bid by asserting that Cnooc's offer might not pass muster with U.S. regulators.
Mr. Fu said his company delayed action because his governing board opted to first study Unocal's holdings more intensively. He pointed at the timing itself as evidence that his company takes no orders from the government.
If it all leads to failure -- if Unocal shareholders conclude the risks are too great and go with Chevron, or if the Bush administration blocks a deal -- Mr. Fu said he would have to re-examine his basic understanding of free trade.
"I would suddenly find out that what Westerners taught us is not the way the West wants to go," he said.
---
Jason Cai and Eva Woo contributed to this article.
Document AWSJ000020050706e1770001m
# posted by Eastlaw @ 9:39 AM 
