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AP Worldstream: CNOOC’s failed bid for Unocal only a temporary setback for Chin

AP Worldstream: CNOOC’s failed bid for Unocal only a temporary setback for Chin

“In Australia, where Chinese oil, mineral and steel companies have been actively courting strategic partners, a takeover attempt on Woodside would face “significant hurdles…”: “An attempt by Anglo-Dutch oil giant Royal Dutch Shell PLC to take over Woodside in 2000 was blocked by the government on national interest grounds.”

Sunday Aug 07, 2005

ELAINE KURTENBACH

Chinese oil company CNOOC’s failed bid for Unocal Corp. was a painful lesson for Beijing on the potential pitfalls of overseas mergers and acquisitions, but it’s unlikely to spoil China’s growing appetite for foreign investments _ including in the U.S.

Hungry for energy and other natural resources and driven by political and commercial imperatives to seek out new markets, advanced technology and brand names, Chinese companies are bound to keep hunting for global investment opportunities, despite the political risks, analysts said.

“They probably will pick their targets more carefully but they will continue to come out,” says Jack J.T. Huang, chairman of international law firm Jones Day’s Greater China practice. “Market pressure will continue to push them out.”

CNOOC Ltd., China’s third-biggest oil company, indicated it would persist in its strategy of investing overseas, despite its decision Tuesday to withdraw its US$18.4 billion (A15 billion) offer for California-based Unocal due to political opposition in Washington.

“We look forward to continuing our strategy and business plan and to growing our business for our shareholders,” CNOOC said in announcing its decision to drop the bid, which cleared the way for Chevron Corp., the second-largest U.S. oil company, to complete its acquisition of Unocal.

By Thursday, reports had already surfaced that CNOOC was considering a bid for Australia’s Woodside Petroleum Ltd. _ reports Woodside branded as speculation.

Eager to tap foreign markets, Chinese authorities are pushing top Chinese companies to go global, says Huang.

With the economy growing at an annual rate of more than 9 percent, crude oil imports have been soaring. CNOOC and other government-controlled oil companies were among the first Chinese companies to begin actively making big investments abroad, buying up big stakes in oil and gas fields in places such as Indonesia and Iran.

The lack of political backlash over those earlier ventures may have left CNOOC ill-prepared for the reaction to its bid for Unocal in Washington, where U.S. lawmakers raised questions over whether the deal might threaten American economic and national security interests.

It hasn’t been all bad news for Chinese attempts to invest in the United States.

Computer maker Lenovo’s acquisition of IBM’s PC unit for $1.75 billion (A1.4 billion) also raised a brouhaha and prompted a U.S. security review, but it eventually went ahead _ as do many other deals that draw less attention.

But with the global race to secure energy resources, Chinese oil and mineral companies in particular are likely to face hurdles and opposition in most parts of the world.

“People are becoming very nationalistic over what’s in their ground,” says James McGregor, author of the book “A Billion Customers: Lessons From the Front Lines of Doing Business in China.”

Beijing might be able to make oil deals in some developing countries, but there are few desirable Third World takeover targets.

Russia has massive energy reserves, but oil firm Yukos’ financial woes have already caused disruptions to oil trade with China, accentuating the risks of investments there.

Chinese acquisitions in Europe, such as television and mobile phone maker TCL Corp.’s deals with France’s Thomson SA and Alcatel SA, have so far raised less of a stir, but there’s potential for a backlash there, too, says Stella Leung, a partner at law firm O’Melveny & Myers in Shanghai with experience in international mergers and acquisitions.

“I can only imagine a same if not tougher reaction among European countries,” Leung said.

In Australia, where Chinese oil, mineral and steel companies have been actively courting strategic partners, a takeover attempt on Woodside would face “significant hurdles,” said John Hirjee, an energy analyst at Deutsche Bank Australia in Melbourne.

An attempt by Anglo-Dutch oil giant Royal Dutch Shell PLC to take over Woodside in 2000 was blocked by the government on national interest grounds.

“Any bid by a foreign company on Woodside will have to go through the Foreign (Investment) Review Board which heightens the risk that the federal government may try to block it,” he said.

Even Thailand, which has sought close ties with China, warned Beijing against letting a Chinese group led by state-owned China National Petroleum Corp. attempt to buy Thai oil and gas assets recently sold by Houston, Texas-based energy company Pogo Producing Co. Pogo instead sold the assets to Thai company PTT Exploration & Production PCL and Japan’s Mitsui Oil Exploration Co., for $820 million (A660 million) in cash.

“Bangkok dealt with that diplomatically, very early on,” says Jason Kindopp, an Asia analyst for the Eurasia Group.

But despite the occasional failure, all signs suggest that Beijing remains committed to its policy, which it has dubbed the “going out strategy,” of encouraging overseas investments.

The biggest challenge is to reconcile the communist government’s desire to retain control of strategic industries and big corporations with the need to assuage foreign worries over state interference in business.

The CNOOC setback appears to have driven that point home.

The government has not directly commented, terming it a purely commercial issue. The official Xinhua New Agency’s reports, virtually the only ones allowed in the entirely state-controlled media, faulted CNOOC for failing to manage U.S. public opinion well.

“Chinese enterprises need to devise overseas direct investment strategies that take into account the changing environment,” the state-run newspaper China Daily said in an analysis of the case.

Chevron’s victory in the Unocal battle, despite an offer that was worth $700 million (A573 million) less, was a vivid reminder to China’s leaders that politics matter, even in the capitalist West, says Ding Xueliang, a China expert at Hong Kong’s University of Science and Technology.

“This case has taught them a heavy lesson when it comes to national security issues, that even a free economy like the United States, as well as Britain and France, the government will exercise tremendous influence,” Ding said.

“Beijing will take it very seriously and will use this lesson in the strategy of going out.”

Associated Press Writer Meraiah Foley in Sydney, Australia, contributed to this story.

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