Skip to content

The Yin and Yang of the CNOOC-Unocal Saga

Implications of the failed CNOOC takeover bid of Unocal in Sino-U.S. relations

The withdrawal of the China National Offshore Oil Corporation (CNOOC) from the bidding war for Unocal made the curtain drop on a mesmerizing drama that has served as an educational lesson for the American public on the complexity of Sino-U.S. relations, but it will surely trigger a new round of discussions and debates.

For people confused about the vaguely worded "political obstacles" cited in the CNOOC’s official announcement as the reason for withdrawal, they need to look no further than a fiery remark by a Chinese general, Zhu Jinwu, which followed on the heels of the CNOOC’s bid, to understand what those obstacles entailed. At a news conference in Hong Kong that saw a gathering of almost all the prominent reporters that an enclave can summon, General Zhu made everyone’s jaws drop by sharing with them an option, or, so to speak, the "ultimate solution," in China’s dealings with the United Statesusing nuclear weapons to "clean up" Uncle Sam at the expense of its own territory east of Xi’an, a city in the northwest. As a Xi’an native, I thank General Zhu for sparing my hometown, but meanwhile I can’t help but wonder about the feelings of other Chinese, about three quarters of its population, who call the other side of Xi’an, a vast, most prosperous land, their home.

True, General Zhu’s remarks were, in his own words, only his "personal opinions." And some pundits have shrugged them off as just another attempt deliberately engineered by the Chinese leadership to benefit from the confusion that would ensue. The words, however, were by no means inconsequential: The courtship of Unocal by the CNOOC was doomed from that point onward, as General Zhu’s words provided doubtless the most powerful, immediate substantiating evidence to anyone opposing the deal on political grounds.

Indeed, if the number one issue facing corporate America is its governance, stemming from the separation of ownership and control that affords its corporate chieftains the opportunity to benefit themselves at the expense of shareholders, then the number one challenge confronting anyone aspiring to advance Sino-U.S. economic ties is China’s inability to separate its economic interests from political ones. Ostensibly, the CNOOC-Unocal deal was blessed with all the support it could ask forfrom the business community as evidenced by editorials in the Wall Street Journal and such illustrious advisors as Goldman Sachs and JP Morgan, to some powerful brokers within the Bush Administration, and even to a few Nobel Prize economists. All this, unfortunately, proved too flimsy to convince, amidst the general obsession with the fallout of General Zhu’s remark.
If anything can be learned from the ill-fated CNOOC-Unocal deal, it is the seemingly well-known fact that before China solves its version of the "separation" problem, any Sino-U.S. deal, however much economic sense it may make, will be tainted with skepticism from the West. The CNOOC-Unocal saga only proves this rule continues to be true, despite the strenuous efforts of the CNOOC management and its eminent U.S. consultants to preempt it. A careful reading of a short article penned by CNOOC’s Chairman and CEO in the Wall Street Journal, poignantly titled "Why Is America Worried?" reveals nine mentions of "shareholder" or "shareholders" but zero mention of "Chinese government," its biggest shareholder, owning more than 70 percent of its stake. Also troubling is what has been conveniently concealed from the public, the other identity of the article’s author himself: Not only is he the top executive of the company and watchdog of its investor’s interest, he is also the Party secretary of the parent company under full control of the Chinese government.

The investors in Unocal may lament over the lost premiums they could have pocketed as windfall if the deal had gone through. Nevertheless, if they really want to blame somebody, they should point to General Zhu, who, out of his allegiance to the Chinese government, should better time his inflammatory remarks, and to CNOOC itself, whose pressure on Unocal to lobby Congress reportedly only heightened the scrutiny of lawmakers and derailed the deal.

To CNOOC and other Chinese companies planning on similar moves, not only do they have to be more careful about their public relations work, they may have to be more transparent in public disclosures about their motives. While it is widely recognized that China’s thirst for oil necessitates deals like the one between the CNOOC and Unocal, it would have been very helpful if the CNOOCowned by a government sitting on more than US$700 billion in reserves, second in the world in terms of its sizecould have made an economic case for the merger, given Japan’s experience that purchasing oil on the open markets is much cheaper than developing oilfields overseas. On this score, China should find the U.S. stance consistent, as the U.S. also has a problem with the purported goal of Iran’s expensive nuclear program, which is to generate electricity to meet urgent civilian needs even though Iran comfortably sits on one of the world’s largest oil reserves.

The failure of the CNOOC to purchase Unocal, at a price higher than the other bidder, is instructive. While its economic cost is obvious, the source of the loss may not be so apparent. At the very least, however, it puts Sino-U.S. economics into the big picture of Sino-U.S. relations, or reality. Furthermore, it shows that any self-denial in the face of this reality is of little use. On the contrary, we may only expect it to persist before the day arrives when business is only and truly business between the two countries.