How Strategic Is Unocal's Oil?
CNOOC's bid for Unocal is slated to go before CFIUS, the Committee on Foreign Investment in the United States, where the various concerns about its national security implications will presumably be debated at length. So far, I've focused my comments on the energy and business implications of this transaction, the basis of which leaves me skeptical about CNOOC's motives. However, there's been plenty of commentary both here and elsewhere about the geopolitical aspects. An idea just occurred to me that just might help to crystallize the basic issues at stake, by putting them into quantifiable terms.
The dilemma is that, from a trade standpoint, the laws and regulations of the United States treat oil no differently than any other commodity. If anything, in the post-deregulation era since the early 1980s, the domestic oil industry has received notably less overt protection than steel, textiles, and any number of other products of lesser importance to the functioning of our national economy than oil. We have allowed our indigenous oil supply to wither, as natural depletion reduces the productive potential of resource basins that have been exploited for decades, while we place other known deposits of oil off-limits to drilling for environmental and other public policy reasons. When combined with an unrestrained appetite for increased oil consumption, the inevitable result has been to roughly double the share of imported oil in our energy mix in the last 20 years.
But even as we continue to treat this strategic commodity more or less in accordance with the principles of free-market economics, we are deeply concerned about the possible acquisition of a mid-sized US oil company--the best assets of which lie in Asia--by an Asian company, and in particular a semi-privatized Chinese state enterprise. In the absence of a comprehensive energy policy governing all kinds of investment, it certainly looks like we are talking out of both sides of our mouth.
Is there a way to quantify the national security value of Unocal's production or reserves? I can think of several, but here are two fairly simple approaches. First, look at Unocal's domestic oil production. According to Unocal's 2004 Annual Report, this amounts to 70, 000 barrels per day (bpd), ignoring natural gas that couldn't easily be exported. Let's assume that the long-term price is now $40/bbl and that it costs Unocal $20/bbl to produce this oil. Having to replace that production with imports, in the unlikely event that CNOOC chose (and was allowed) to export it, would increase the US trade deficit by $500 million per year, for a net present value of $3.7 billion at 6% interest over 10 years.
A simpler approach is to consider control as a proxy for the national security value. Comparing the two competing bids for Unocal, the CNOOC offer is higher by about $1.7 billion. This could be thought of as the premium for foreign control, over and above the fair market value established by Chevron's bid, assuming no other US company would have paid more.
Looking at the combination of these two approaches suggests that the value of keeping Unocal in US hands is somewhere between $1.7 and $3.7 billion. The best way to resolve a situation that risks igniting a trade war with one of our largest trading partners might simply be to offer Chevron tax credits or other considerations in the range of $2 billion, to enable them to outbid CNOOC without destroying value for Chevron's shareholders (including me.)
Now, you can argue that this would constitute a form of highly selective corporate welfare, or violate WTO rules, or that $2 billion could be better spent on funding alternative energy research. All of these might be true, but framing the problem this way at least concentrates our thinking about what it's worth to keep Unocal in American hands. After all, simply blocking CNOOC's bid by fiat, on shaky political grounds, seems certain to cost this country much more than $2 billion in the long run.
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