Global Insight Perspective

Significance

The public announcement confirms speculations that, despite Unocal's acceptance of Chevron's generous offer, CNOOC has found it impossible to walk away from the promise of Unocal's Asian oil and gas reserves.

Implications

CNOOC's inability to relinquish the Unocal deal has caused a rift in the company's board, and it will have to pull itself together quickly in order to take advantage of the short window it has to mount a challenge to Chevron's already-accepted offer.

Outlook

Because there has been no regulatory challenge to the Chevron/Unocal deal, Chevron is certain to resist any attempt by CNOOC to interfere with its deal, and CNOOC's persistence could see it pay even more than it has already paid in order to keep its purchase.

CNOOC Still Hungry for Unocal

China National Offshore Oil Company (CNOOC) has admitted that it is considering a counter-offer to Chevron's US$18-billion takeover deal with Unocal. In a statement to the Hong Kong Stock Exchange, the company stated that it was 'continuing to examine its options with respect to Unocal. These options include a possible offer by the company for Unocal, but no decision has been made in this respect'. However, the company added that it was unable to make any assurances that it would ultimately make an offer for Unocal. The statement is CNOOC's first public confirmation of its lingering interest in Unocal. 

According to a report by the Financial Times, the company has decided to hold off on a final decision on a counter-bid until the middle of June. Late last month, concern over the financial implications of CNOOC's plans for the counter-bid for Unocal reportedly prompted the company's non-executive directors to subject the proposal to further review by a set of independent advisers separate from those hired earlier by the company. It is possible that the final decision on Unocal has been postponed until the completion of this review. 

Although Chevron's bid for Unocal has been accepted, the takeover is still awaiting regulatory approvals, and CNOOC hopes to be able to push its way through before the deal closes. There has been speculation that the US's anti-competition rules could cause difficulties for the deal, and this has been fuelled by the recent request for additional information on the deal issued by the US Federal Trade Commission. Although the request on its own is far from indicative of any significant difficulties in the deal, it could extend the waiting period for regulatory approval, giving CNOOC the opportunity to collect itself and return with a serious counter-offer.

Outlook and Implications

CNOOC's refusal to relinquish the deal it almost had with Unocal reportedly caused a serious rift within the company's board, as demonstrated by the refusal of non-executive directors to accept at face value the recommendations of the management group. It is this same lack of agreement on the issue that reportedly cost the company the Unocal deal in the first place, allowing Chevron to get ahead of it in the race for Unocal. Given that Chevron's US$18-billion cash/stock and debt offer was considered a high price to pay for Unocal's reserves, concerns over the financial burden that a successful counter-bid for the company would place on the much-smaller CNOOC have been at the root of the conflict. 

For their part, however, Chinese companies have shown themselves to be keen on acquiring oil and gas reserves regardless of the cost, and CNOOC would be able to pull off the counter-bid with support from the Chinese government, which has not shied away from offering similar assistance in the past. Last year, the government extended a US$2-billion reconstruction loan to Angola despite concerns by the International Monetary Fund and other donor countries over the country's fiscal transparency, enabling Sinopec to interfere with ONGC's pre-arranged deal with Shell for its 50% stake in a proven oil block. Although the Unocal deal will certainly take a different form, given CNOOC's size, the company is almost certain to be given some assistance by the government.

If CNOOC does go ahead with a counter-bid, it will be the first serious challenge posed by a Chinese oil company to the more established US companies. Until now, CNOOC has restricted its more public face-offs to its Asian counterparts, but the lure of Unocal's Asian assets appears to be too much for the company to resist. However, in its seemingly unstoppable thirst for oil, the company is now preparing to encroach on what has clearly been marked as US oil territory, and it is difficult to predict what the political aftermath of this could be. For its part, having agreed to pay such a hefty price for Unocal if it does come to it, Chevron is unlikely to back down without a fight.