Unocal Deal Update

Chevron OKs rival Unocal-CNOOC talks; won't sweeten offer

EL SEGUNDO, Calif. -- Unocal Corp. said late last week that it received a waiver from Chevron Corp. enabling it to engage in discussions with Chinese state-owned oil company CNOOC Ltd. concerning a rival bid to acquire Unocal proposed by CNOOC at any time until the date of the Unocal stockholder vote on the proposed merger with Chevron.

Chevron already has a deal in place to buy El Segundo, Calif.-based Unocal for nearly $16.6 billion in cash and stock.

Unocal said it intends promptly to commence such discussions with CNOOC. Whether [image-nocss] the purchase of Unocal by the Chinese would pose a risk to U.S. security is just one of many hurdles the proposed $18.5 billion offer must overcome, reported the Associated Press.

A letter to Treasury Secretary John Snow was circulating in Congress last week calling on the Bush administration to investigate the national security implications of the proposed deal. It was signed by Representatives William J. Jefferson (D-La.), Al Green (D-Texas), Bobby Jindal (R-La.) and Kevin Brady (R-Texas).

Snow, who chairs a federal panel that considers security risks of foreign firms buying or investing in U.S. companies, told a Senate Finance Committee hearing on China's currency system that he expects both parties to voluntarily submit to a review.

It's not a business transaction at all, C. Richard D'Amato, chairman of the U.S.-China Economic & Security Review Commission, a congressional advisory panel, said Thursday. This is not a free market deal. This is the Chinese government acquiring energy resources.

Fu Chengyu, chairman and CEO of CNOOC, which is 70% owned by the Chinese government, dismissed such fears Thursday, calling it a purely commercial transaction that would benefit Unocal shareholders. He voiced confidence that the U.S. government would support the deal if the companies strike a deal.

Many oil industry experts agreed that security fears were unwarranted and even warned that such responses could make it harder for U.S. oil giants to gain the international access they need to grow. This is not a company building military aircraft or missile technology. This is energy, at the end of the day, said Lawrence Goldstein, president of the nonprofit Petroleum Industry Research Foundation in New York.

The offer also sets up a possible takeover battle with Chevron, which said it will not sweeten its offer, at least for now. We're satisfied with the bid we have on the table, Peter Robertson, Chevron vice chairman, said in an interview on CNBC. We think it's still the best opportunity for the shareholders.

Americans are worried about the supply of oil and gas. There is an issue here of who can put more oil and gas into the market on a commercial basis. I think if the Chinese government buys this asset, you can be sure that much of these materials will go to China, Robertson said.

But industry analysts say the deal poses no genuine supply threat to the U.S. market, which imports about 12 million barrels of oil per day, because Unocal's resource base in the United States is relatively small. It is Unocal's Asian assets that CNOOC is really interested in, they said.

CNOOC said the acquisition would more than double its production and estimated that 85% of the combined reserves of both companies are located in Asia and the Caspian Sea region.

Moreover, a deal between CNOOC and Unocal could benefit American companies, consumers and workers in the long run, analysts said. Oil analyst Fadel Gheit at Oppenheimer & Co. in New York said it would be the pinnacle of hypocrisy for the United States to put roadblocks in CNOOC's way, considering that President Bush and others in his administration have repeatedly scolded Russia for not opening its doors enough to U.S. oil companies. American companies must expand globally, but if we cut off people from coming into our country other countries will just block our companies from doing the same, Gheit said.

Chevron might raise its offer slightly, but is not likely to engage in a bidding war with the Chinese, said Gene Gillespie, an oil analyst with investment firm Howard Weil Inc. I think Chevron is more financially disciplined than that, Gillespie said. Chevron is not under a lot of pressure to do anything in the short term, Gillespie said, because of the high degree of uncertainty over whether the CNOOC bid would be approved.