Friday, the Unocal board of directors met and voted not to accept state-owned China National Offshore Oil Corp.’s bid (through its Hong Kong registered and only partly owned subsidiary, CNOOC Ltd.) of $18 billion bid to buy the company, opting instead to stay with the $16.4 billion Chevron bid made earlier this year but noting that if CNOOC sweetens the deal, it will be up to a general vote of shareholders come August 10.
CNOOC even offered to sweeten the pot, with a $2 billion cancellation fee (money paid to Unocal shareholders in the event that CNOOC’s bid fails). No dice. Stinks of failure and desperation.
Chevron and Unocal are working quickly to knit the two companies together. Unocal managers are already working for Chevron right now. And in the surest sign of corporate confidence, a few days after announcing its bid for Unocal in early April, ChevronTexaco dropped the Texaco to become just plain ol’ Chevron again and rolled out a "new and improved" corporate logo.
So the likely outcome, unless CNOOC digs into the Chinese government’s giant bag of cash and pulls out $20 billion, is that Chevron and Unocal will be fully merged by the end of the year, with Chevron possibly selling CNOOC stakes in (the former) Unocal’s natural gas operations in Indonesia and, quite possibly, its entire (and very problematic) exploration and production operation in Myanmar.
Sorry, no Red Chinese hoards swarming over the Rio Grande, gasoline tanks filled with "The Spirit of ’76." Not today.
That isn’t stopping anyone, of course. North Dakota Democratic Senator Byron Dorgan (whose comb-over is a wonder of modern civil engineering) on Friday proposed legislation that would ban the sale of Unocal to CNOOC — or CNOOC’s purchase of Unocal, I’m not entirely certain how it would work — saying that the Chinese government certainly would not allow an American oil company to buy a Chinese oil company.
Maybe he’s been reading some of the e-mail I’ve been getting. One writer, who I will use as a foil in this piece (but not name; it is nothing personal, and he did ask me for my thoughts on the subject), wrote this:
Is free trade really possible where the market itself is not free, and is not unencumbered by government intrusion?
I would submit it is not; the lack of government intervention is what defines the free market. And in trade deals with China, this is not the case; CNOOC is OWNED by the Chinese government, therefore there is NOT a free market in place. A contrast is a trade between private companies, or trade within the boundaries of a free market, such as Virginia trading with Texas. Because the marketplace defined by China and the US is not a free market — because of the Chinese government’s role as one of the parties — a condition of truly free trade cannot exist. Those private companies competing with CNOOC for UNOCAL have to watch their bottom lines and be truly competitive; CNOOC has the luxury of going back and getting more money from itself.
A similar situation exists, in my mind, when Boeing competes with Airbus, which is subsidized by European governments.
The principle he expresses here is one of reciprocity — we should do for others what they for us, but we should not do for others what they do not do for us. I’ve gotten this a lot, especially when I’ve written about Islam, e-mails from angry readers who believe Americans are “patsies” for allowing Muslims the freedom to worship in this country when Christians do not have the same freedom in parts of the Muslim world, especially Saudi Arabia. (I’m being polite using the word “patsies,” since the term used by those who have this view is much harsher; but Lew has chastised me on my language in the past…)
Reciprocity sounds kind of like the Golden Rule. But it isn’t. There are several objections, utilitarian and principled. I will start with the utilitarian.
Yes, CNOOC is a state-owned company. So what? Let’s go even farther. The good senator is quite correct, the Chinese government would not allow a US-based international oil company to buy a Chinese oil firm. But it’s important to add at this point — there’s nothing in China any smart US-based major would want to buy. Virtually everything a western major could want in China — exploration and production opportunities (mostly offshore), refining, retail marketing — foreign firms can negotiate joint ventures for. Anything else that a Western major might be interested in owning — reserves with a guaranteed customer base and a solid return on invested capital — are not really available is China.
The writer, and I’m certain many others, looks at Unocal and sees an American company. (And, I suppose, kind-of an American national patrimony.) But it isn’t. None of the majors are really American companies anymore. Unocal is an international oil company with an American address. When any of these companies makes an investment decision today, they look first and foremost at what kind of return their investment will get. Not who get the oil or the gas.
So long as customers buy to reward shareholders and investors, it does not matter who those customers are.
Dorgan pointed out that Unocal has about 1.5 billion barrels of proved reserves. True enough. (It just unloaded its Canadian reserves.) About 900 million of that is in Asia, 400 million in the US, and the rest scattered across the world. Very little of its overseas resources find their way to North America. Unocal refineries have to source their crude the same way many refiners do, by buying it from other producers.
There are a lot of foreign state-owned companies that have significant investment in American exploration, production and refining — Americans do a lot of very beneficial trade with unfree places. Companies from countries where similar investment is difficult or banned outright. Saudi Aramco owns, along with Royal Dutch/Shell, Motiva Enterprises, one of the largest refiners in the United States. Yet, upstream investment by foreign firms in Saudi Arabia is banned, though investment in refining and petrochemicals is not. Venezuelan state-owned Petroleos de Venezuela (PDVSA) owns Citgo — one of the company’s most profitable endeavors. Yet, the Venezuelan government has, over the last year, tightened the screws on foreign upstream investment, unilaterally abolishing contracts, changing laws and levying taxes, making the place much less inviting for even state-owned firms. State-owned Petroleos de Mexicanos (Pemex) jointly owns Deer Park Refining, one of the largest single refineries in the US, with Royal Dutch/Shell, and yet the Mexican constitution bans outright foreign ownership of hydrocarbons, making it impossible for Yanquis to wander around Mexico drilling for oil or gas.
All of these state-owned firms have something in common — none of them are major international firms. Aramco focuses entirely on poking holes in Saudi Arabia, though where it sees markets for its crude, it is more than happy to develop those markets. Same with Pemex and PDVSA when it comes to their respective home countries.
None of the big Chinese oil are international firms either. They have few investments outside their home company, though they are slowly and cautiously cultivating them in Latin America and elsewhere across Asia. China is in that awkward period the US was about 35 years ago, when its national economy began passing from domestic self-sufficiency to import dependence. Prior to the 1970s, US firms were in a similar position, when they truly were American companies simply because there was so little demand for refined petroleum products elsewhere in the world.
Were CNOOC successful in its bid to buy Unocal, it would become an international oil company, with lots of customers outside of China. They would not get shorted — the company would find itself in trouble if it did. And as China’s firms become more international, they will most certainly do what American oil firms have done — become less parochial and eventually figure out there’s money to be made supplying products to anyone able and willing to pay, and not just the home market.
The writer also suggests that CNOOC is in no way accountable to the market. True, the company can rely heavily, thought not entirely, on state coffers for support. It does not have to sell its debt on the open market to potential buyers. But remember, 30% of CNOOC Ltd. — the subsidiary making the actual bid — is held by private shareholders. Asian stock analysts are very concerned at the amount of debt that CNOOC, a comparatively well-run Chinese oil company in comparison to PetroChina or Sinopec, would have to take on in this deal. They are prepared to lower the company’s ratings accordingly.
That threat may not hurt CNOOC, or any other Chinese company, now. But it will. Sooner or later.
China’s big banks may be state-owned, holding billions in bad debt and politically inspired debt that will never be paid off, but that hardly means the Chinese state will always be there to bail them out. Eventually, these bad banks will fail. The same people who argue that Communist China will always be able to rejigger the books are, probably, the same people who argued in 1982 that the Soviet Union could never simply just up and disappear because despite the contradictions and irrationality of a planned economy, the state could keep everything together by force.
And yet the Soviet Union did just that — up and die. Force can only bolster fiction for so long. Eventually, the bills come due, and they must be paid. Y’all have way too much faith in the state.
But suppose that CNOOC, or any of the other Chinese majors (or Hutchison Whampoa, which owns a controlling stake in Canada’s Husky Oil) decided to buy a smaller company more integral to US domestic production, like Anadarko or Occidental? Would that mean it’s okay, suddenly, to block the sale, to make sure the Chinese government, through a state firm, does not become the largest landowner in the Permian Basin or the Gulf of Mexico?
No, because there is still a matter of principal: exactly when did Unocal become public property? More importantly, when did our liberty become contingent on liberty elsewhere? When did the right of a Unocal shareholder (American or not) to sell his or her shares to whoever he or she wants become completely dependent on whether some other potential shareholder can buy stock in PetroChina, Sinopec or CNOOC? What kind of liberty is this?
Adam Smith detailed four or five instances when tariffs are advisable, one of which is for industries that are vital to the defense of the country, and I think we can agree that oil is just such an industry. Is it more the responsibility of the US government to protect the ability of the consumers to buy a cheaper gallon of gas, or to protect vital industries?
Smith advocated free trade within the British Empire — a single free market by itself — and the use of tariffs as diplomatic tools when trading with foreign countries, that were not part of the British Empire.
Oh, that kind of liberty. Government liberty. The worldview is collectivist and statist. It thinks of governments and nations first, and the individual third (possibly a distant third). It may consider itself conservative and "anti-government," but it is certainly collectivist in a right-wing, social democrat way that clearly has no problem with the primacy of the state over private property. (This view may even believe that private property rights, like the rights of individual, owe their existence to the state.)
(As an aside, the writer’s use of the Airbus/Boeing example is instructive. While Airbus is criticized, and rightly so, for receiving direct subsidies from the EU and member governments, he fails to mention that Boeing could not survive without the Pentagon feeding tube, squandering billions of tax dollars and resources on pointlessly lethal "products" that only governments are eager to develop and buy. Those contracts are as much subsidies as the EU’s aid to Airbus — a point that EU negotiators are right to make every time they make it.)
If national defense becomes the measure by which the state can justify the seizure of anyone’s property, then there is no private property anymore. How that makes us different from the dastardly Chinese I don’t know.
Frankly, I don’t care much what Adam Smith says about the role of nations and national governments. As someone who aspires to being an Austrian (economically), I believe in trade for its own sake, and the right of the individual to engage (or not engage) in commerce with anyone for whatever reason, regardless of what government says or wants. Were I a Unocal shareholder (I am not), I may or may not choose to sell to CNOOC. But you (whoever you are) do not have a right of veto, a right to tell me what I can and cannot do with my property. And there is no nebulous "we" that has a right of veto either.
Who an individual — or a business, or a corporation — trades with, or refuses to trade with, ought to be guided solely by conscience and business sense. Nothing is preventing those concerned about CNOOC’s bid from trying to persuade Unocal shareholders of the wisdom of not selling to an oil company own by the government of the People’s Republic of China. Environmental groups, labor activists, social conservatives and others have gone directly to corporate boards in the last few years, and whether you agree with the aims, the means are entirely non-coercive — they do not involve force or a resort to law or regulation. And sometimes successful, too. Nothing wrong with threatening a boycott, to mount an advertising campaign, to invest strategically to achieve certain ends. The company doesn’t have to give in. Its executives can always speak for themselves.
I personally don’t give a fig for government policy. I do not care about the welfare of national governments. I do not believe the United States government, the Commonwealth of Virginia, the City of Alexandria or the Chinese Communist Party have the moral authority to tell me who I can and cannot sell to or buy from. For whatever reason. Period. They should not have the legal authority either, though I recognize the unfortunate reality that they do.
However, the state has enough defenders and enablers. I hear from them often enough. But I’m not going to waste my time trying to steer the ship of state when I believe it ought simply to be scuttled.
Charles H. Featherstone [send him mail] is a Washington, D.C.-based journalist specializing in energy, the Middle East, and Islam. He lives with his wife Jennifer in Alexandria, Virginia.
