CFIUS Should Block the CNOOC Acquisition of Unocal

Chevron announced some time ago that it would offer $61 a share in cash and stock to buy California-based Unocal Corporation.  It was mildly newsworthy and raised few eyebrows. 

Before the Unocal shareholder vote on the offer, however, a new company, Hong Kong-based CNOOC Ltd., made a superior offer for Unocal of $67 a share in cash.  A thunderstorm of opposition gathered.  Not only was CNOOC a Chinese-owned company, its 70 percent owner was the Chinese government itself. 

The United States House of Representatives passed overwhelmingly a resolution asking the President to block the takeover. 

The Chinese Foreign Ministry hired well-placed United States investment banks, lawyers and lobbyists and mounted a counter-attack.  Unocal, they argued, did not own any United States refineries, was responsible for only a small percentage of United States oil production and owned an even smaller percentage of United States oil reserves.  CNOOC would promise to leave all Unocal’s United States assets to the United States; CNOOC wanted Unocal’s rights to Asia oil.

The Chinese media campaign had notable successes. Wall Street Journal editorial page and other financial commentators came out in support of the CNOOC acquisition.

The CNOOC acquisition now falls in the lap of the Committee on Foreign Investment in the United States (CFIUS) and ultimately of the President.  In 1988 Congress, responding to the attempts of Japanese companies’ attempts to takeover US companies (specifically Fujitsu attempted takeover of Fairchild Semiconductor), passed an act (the Exon-Florio Amendment) enabling the President to block takeovers that could “affect the national security of the United States.”  Furthermore, an investigation by the President was mandatory if the takeover was by an entity controlled by a foreign government. 

The President delegated authority to investigate foreign acquisitions to an inter-agency committee, CFIUS, created by an executive order in 1975.  CFIUS is chaired by the Secretary of Treasury and has eleven members.  There are representatives from the Departments of Treasury, State, Defense, Commerce, and Justice, from the Offices of the US Trade Representative, Science and Technology Policy, and of Management and Budget, and from the Council of Economic Advisors and an Assistant to the President for Economic Policy.

CFIUS will make a recommendation to the President on whether to block the CNOOC takeover and the President has 15 days to decide what to do.

The key term in the statute, “national security,” remains undefined in the statute and supplementing Treasury regulations.  The legislative history to the statute favors a broad meaning of the term and the statute itself includes the “capacity of domestic industries to meet national defense requirements.”  Oil production and reserves, necessary to run military machines, are obviously included.

There is no limitation in the statute on the source of oil held by a domestic company.  The statute does not just apply to United States assets (oil found in the United States) but also applies to domestic ownership of foreign assets (foreign production and reserves owned by a domestic company).

CFIUS should recommend that the President block the CNOOC takeover and the President should agree.  First, China is not a market player.  It will take the Unocal oil assets off the market and divert them to the use of oil-starved China and its industries.  United States refineries will not be able to buy oil from Chinese companies.  This is not a country that respects private ownership and private markets.  Second, United States companies cannot purchase and, without a government change, never will be able to purchase control of Chinese oil companies.  There is no reciprocity.  Third, China, as a single major purchaser with tremendous wealth, is seeking a consolidated position in the world’s oil markets.  We should not facilitate the creation of a new monopolist in the world’s oil markets.

Short of a sale of military technology or hardware it is hard to imagine a type of takeover more important to national security.