BACKGROUND: Chevron is seven times larger than CNOOC, but as CNOOC is a state-owned enterprise, it has the backing of China’s foreign currency reserve, dwarfing Chevron’s economic turnover and for that matter the economic value of all US oil companies together. It has been noted in the U.S. Congress that China could buy all the American oil companies with its foreign currency reserves, if allowed. It should also be noted that Royal Dutch/Shell owns a substantial part of CNOOC, which it acquired in 2002 when CNOOC conducted a public stock opening. However, fierce reactions from both Democrats and Republicans in the U.S. Congress were raised to refuse the Chinese bid to acquire a “strategically important” actor and a road to dominate Asia’s energy market. In Central Asia and Azerbaijan, it has been argued, this deal should have been especially notable given the oil exploration and pipeline projects that Unocal is engaged in. As a result, the U.S. House of Representatives voted overwhelmingly for a non-binding resolution advising the Bush administration to block CNOOC from merging with Unocal. Chevron has increased its bid and the Chinese have yet to react through CNOOC to this counter-bid before Unocal stockholders meet on August 10th. Regardless of the Chinese counter-bid, this process is no longer about economics but has, at least in Washington, come to be about politics and the potential spread of Chinese influence in a region where the U.S. would like control or at least limit Chinese influence. The arguments emanating from the U.S. have focused overwhelmingly on security and protectionism even as the Chinese representatives have repeatedly claimed that this is a purely economic transaction. Both arguments are somewhat flawed.

IMPLICATIONS: The implications of a CNOOC-Unocal merger would be modest in Central Asia, as Unocal accounts only for 0.23 percent of world oil output and 0.3 percent of the U.S. consumption of oil, with reserves of 1.75 billion barrels of which 980 million are in Asia. Relatively small amounts of these reserves are in Central Asia. The deal’s impact would be much higher in Burma, Thailand and Indonesia even if it would not be significant enough to dominate the oil and gas markets in these states. However, the aggressive larger Chinese policy to buy oil and gas assets at almost any cost has targeted Unocal as a primary interest. This is largely due to the fact that Unocal controls some of the most interesting oil and gas fields in China’s immediate surrounding; and controlling energy resources in its immediate proximity is increasingly appearing to be a goal for Beijing, which has effectively targeted oil and gas resources in Central Asia and in particular Kazakhstan. If China would, as it seems, aim for regional influence and control over energy resources, Unocal is a very interesting actor as a step in a larger strategy in spite of its relatively small impact on the world market. China has for some time focused on strengthening its regional position politically as well as economically, and if this can increase its energy sustainability, all the better. In the short-term, China is in need of energy resources that can sustain its current economic development. China does not, despite some arguments, face an acute oil crisis – but the future, when it comes to sustaining China’s energy, needs looks grimmer. Proven oil and gas resources are necessary since much of China’s current investments are in oil and gas fields that have great potential, but these are either far from actually producing oil, or their connection to China through pipelines is incomplete. Therefore it makes economic sense to merge with existing companies with ongoing operations that would result in new energy resources available today. The competition for available energy resources is stiff, and China has overpaid for more than one oil deal in the past. Unocal seems to be no exception, unless political considerations and American protectionism takes over and the deal goes to Chevron. In the long term, a Chinese acquisition of Unocal could establish a Chinese contact with the Middle East through the investments Unocal has made in pipelines, some of which could be connected to existing Chinese plans to construct a pipeline that connects the Middle East to Northeast Asia. The deal in itself will not tilt the strategic influence in Central Asia or any other region in any direction, but it has to be seen in the context of a long term Chinese strategy. Over a longer period, even if China appears to be overpaying for energy assets, extending control over strategically important energy resources in Central Asia and elsewhere could prove to be financially sound, especially with the potential political influence that control over energy resources will carry. China has made it clear that it is in its national interest to secure energy resources, and the Middle East and Central Asia as a transit route and partial providers is crucial in this strategy. Apart from the deal’s economic implications, it carries a potential to increase Chinese influence over governments in Asian countries. Unocal’s impact might be minor, but more importantly the deal would work toward China’s aim to decrease the American commercial and political presence in the region. Concomitantly, the U.S. would firstly lose one indirect lever to influence regional governments, but more importantly, it would lose a tool to check the Chinese expansion in Asia. In spite of all the geopolitical implications of CNOOC’s bid for Unocal, this bid should be put in context. Chinese investments in Iran are estimated to exceed $100 billion over a 25-year period. For example, in 2004 it was concluded that China would import 360 million tons of liquefied natural gas from Iran. Similarly, China’s investments in Kazakhstan exceed the Unocal bid, even if it is the single largest proposed merger that has been seriously attempted between a Chinese and a western firm. This said, in today’s tight oil markets, even a small acquisition is important in a larger scheme and the outmaneuvering of political competition is important for both actors.

CONCLUSIONS: The direct consequences of this single merger appear to be exaggerated by some political forces in the U.S., even if its long-term consequences would undoubtedly be to favor China’s aims at increasing its influence over regional actors and create a direct access to Middle Eastern oil through Central Asia. The Chinese claim that this is simply a business transaction and that there are no political elements tied to this bid is nevertheless equally problematic. Without a doubt, the acquisition of new oil fields are of economic importance, but the overpayment that Beijing is engaged in is not financially sound. Even if these deals are done with a view for the long-term, the payment has to include a political premium – i.e. the hope that they could influence regional actors in the future. However, from a Central Asian perspective, it could be positive if the deal went to Chevron as this would check the increasing Chinese influence in the region, something that strong forces in the regional countries would welcome.

AUTHOR’S BIO: Niklas Swanström is Program Director of the Central Asia-Caucasus Institute and Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with Johns Hopkins University-SAIS and Uppsala University. He is also a visiting professor and Faculty member at Renmin University in Beijing, China.