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19 July 2005

Congress Cites Security Concerns over Chinese Bid for Unocal

Lawmakers cite regional security issues, transfer of dual-use technology

By Todd Bullock and Katie Xiao
Washington File Staff Writers

Washington -- China's third-largest oil producer, the China National Offshore Oil Company (CNOOC), has offered $18.5 billion for the California-based oil company Unocal amid increasing opposition from U.S. legislators on national security grounds.

China is seeking overseas oil and gas fields as its energy imports surge to keep pace with the growth in its $1.65 trillion economy -- the world's fastest-growing major market. Rising oil demand in China, the United States and India is helping lift oil prices, which reached a record $62.10 per barrel in New York on July 7.

Half of Unocal's oil reserves are held in Asian countries, including Indonesia and Thailand, and 62 percent of its total energy reserves are natural gas, which China is increasingly burning instead of oil and coal.

Unocal's shareholders are set to vote August 10 on whether or not to accept CNOOC's bid or a stock-and-cash offer from the California-based oil company Chevron that is worth $1.5 billion less.

ENERGY IS "A STRATEGIC COMMODITY"

"Congress is normally reluctant to get involved in a normal business transaction, but it has a responsibility to examine those issues if the transaction concerns strategic natural resources," Representative Duncan Hunter, a Republican from California and chairman of the House Armed Services Committee, said at a July 13 hearing on the proposed deal.

"The simple fact is that energy is a strategic commodity," Hunter said. "The infrastructure, drilling rights and exploration capabilities Unocal uses to provide energy on the open market all represent strategic assets that affect U.S. national security."

The lawmaker also said the Chinese government's partial ownership and funding of CNOOC are relevant issues in Congress' assessment of CNOOC's bid.

"Chinese enterprises do not follow the normal rules of the market because they are state-owned and state-financed entities, and of more concern, answer to the Chinese government," he said.

CNOOC'S BID THREATENS ECONOMIC, REGIONAL SECURITY

Richard D'Amato, the chairman of the U.S.-China Economic and Security Review Commission, cited economic and national security concerns with the CNOOC bid at the same hearing.

"China's strategic approach threatens the long-term viability of U.S. policy to rely on open markets, to promote energy security for everyone, and to promote sharing arrangements in the event of supply disruptions," he said.

According to D'Amato, CNOOC's control of Unocal's gas holdings in Indonesia would be a threat to regional security should the deal go through.  D'Amato also noted that Taiwan buys 60 percent of its imported natural gas from Indonesia and raised the question of whether China would allow such gas exports to continue.

Another issue would be China's acquisition from Unocal of dual-use technology, such as those for deep-sea exploration and drilling, that "have national security concerns and should not be transferred to China," he said.

"Why is the Chinese government willing to spend so much money to buy this company?" D'Amato asked.  "By any conceivable standard, the U.S. government should see and treat this proposed transaction as a non-commercial transaction with other motivations and purpose."

D'Amato also cited China's lack of reciprocity on investment opportunities as a reason to reject the bid.

"In key sectors like energy, China requires foreign firms to form joint ventures with Chinese companies," he said. "Furthermore, there are additional obstacles to investment including Chinese pressure on companies to hand over key technologies as a cost of entry into China."

HOUSE RESOLUTION URGES PRESIDENTIAL REVIEW OF DEAL

Prior to the House Armed Services Committee hearing, the full House of Representatives voted 398 to 15 on June 30 to approve H. Res. 344, a nonbinding resolution that urges President Bush to conduct a thorough review of the deal.

The measure, introduced by House Resources Committee Chairman Richard Pombo (Republican from California) June 29, cites Section 721 of the Defense Production Act of 1950, which authorizes the president to block the acquisition of a U.S. company by another country if there is credible evidence that acquisition could pose a threat to national security.

According to the resolution, the proposed CNOOC-Unocal deal is a matter of national security concern because of the resulting transfer of sensitive technology and data with dual-use applications to a Chinese company, Unocal’s control of a significant volume of the world’s total oil supply, and the effect the proposed transaction would have on the U.S. economy.

Five other Republican legislators, including Hunter and House International Relations Committee Chairman Henry Hyde, had signed on as co-sponsors of the measure as of July 19.

Hunter and Pombo also sent a letter to the White House June 17 encouraging Bush to consider the national security implications regarding the transfer of technology to China in the event of Unocal's acceptance of CNOOC's offer.

"The United States needs to understand the nature of the Chinese energy sector and its relationship with the Chinese government," the letter says.

See also "Bush Administration Says Review of Chinese Unocal Bid Premature” and "China Must Address Economic, Security Concerns, Commission Says."