Wednesday, June 22, 2005

11th Hour
It remains to be seen whether the China National Offshore Oil Corp. (CNOOC) will make a last-minute effort to outbid Chevron for Unocal. CNOOC has been interested in Unocal, with its heavy weighting of Asian oil and gas reserves, for months. They would have to top Chevron's $16+ billion dollar offer, and in doing so would raise a number of significant questions about the compatibility of their motives with their status as a partially privatized state enterprise. This is a deal that makes sense only to Beijing's Politburo, not to CNOOC's
shareholders, who stand to lose significant value.

The track record of national oil companies acquiring energy assets outside their home countries is poor. When you consider only the national oil companies of oil consuming countries, the picture gets even worse. Japan is a good example. In the wake of the 1970s oil crises, the Japanese government spent billions buying into oil projects around the world. All they have to show for this effort is a concession off Saudi Arabia's Neutral Zone and a few other dribs and drabs. Meanwhile, Japan has purchsed 99% of its oil needs in the open market.

Aside from any geopolitical concerns a CNOOC purchase of Unocal might raise, this investment would do little to guarantee more oil for China. If Unocal's oil makes sense for China, it will go there anyway, regardless of who owns it. That's how the global oil market works. Otherwise, it will end up elsewhere, unless CNOOC's management is willing to destroy economic value for their public shareholders by suboptimizing the value of its production. CNOOC's outside directors should focus squarely on this issue, as they consider whether to trump Chevron.

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