Secretive US panel could block Chin's Unocal bid

Secretive US panel could block China's Unocal bid
Sat Jun 25, 2005 4:40 AM BST
By Jim Wolf
http://today.reuters.co.uk/news/newsArticle.aspx?type=topNews&storyID=2005-06-25T034016Z_01_FOR513193_RTRUKOC_0_ENERGY-UNOCAL-CFIUS.xml

WASHINGTON (Reuters) - If Unocal Corp. accepts an $18.5 billion takeover by China's CNOOC Ltd. the deal's fate may hinge on how a secretive U.S. review panel defines "national security," experts said on Friday.

"The primary question for this transaction is whether they consider energy security to be a national-security issue," said Michael Wessel, a Democrat and a member of the U.S.-China Economic and Security Review Commission.

Wessel said the Bush administration, so far, had restricted the definition of national security.

State-owned CNOOC's unsolicited bid trumped a roughly $16.4 billion offer from Chevron Corp. and coincides with record oil prices, unease over China's $160 billion trade surplus with the United States and concerns about its growing military might.

The 12-member Committee on Foreign Investment in the United States, or CFIUS, is chaired by the Treasury secretary and brings together top White House aides, the secretaries of State, Homeland Security, Defense, Commerce and Justice and the U.S. Trade Representative.

Under a 1988 law, the president may deny a foreign acquisition of a U.S. corporation only if a CFIUS review establishes two things:

-- credible evidence that the foreign entity seeking control might threaten national security and;

-- relevant laws do not provide adequate authority to protect national security.

In 2003, a CFIUS review led to the collapse of a bid by Hong Kong-based Hutchison Whampoa> to buy then-bankrupt telecommunications company Global Crossing.

But China's Lenovo Group Ltd. was approved to buy IBM's personal computer business this year despite objections from some China critics and a CFIUS review.

Since taking shape 17 years ago, CFIUS has reviewed 1,560 cases, only 25 of which involved expanded 45-day investigations. A CFIUS review normally takes 30 days.

Unocal, the ninth largest U.S. oil and gas production company, has extensive holdings in Asia. If CNOOC succeeds, it would mark the largest overseas purchase by a Chinese firm.

Voicing concern over China's mounting clout, the chairman of the House Small Business Committee, Rep. Donald Manzullo, an Illinois Republican, said Thursday:

"We must reform the CFIUS process to consider economic security as part of national security," Manzullo said.

The law creating CFIUS does not define national security. CFIUS reviews typically have focused on whether proprietary U.S. technology with strategic uses is available elswhere.

Wessel said any CFIUS review would have to look at whether any Unocal oil-drilling and oil-prospecting technologies could help China test nuclear weapons or mask such tests.

But CNOOC's bid raises a potential new concern -- that it could help China corner oil supplies, threatening U.S. security by jeopardizing its energy resources and economy.

The prospective CFIUS review would be the first to focus on a natural resource company, according to William Reinsch, a Commerce Department undersecretary under President Bill Clinton. "In that sense, it's groundbreaking," he said.

Reinsch, president of the National Foreign Trade Council, a private business group, said a key issue likely would be the productive capability that China may be "locking up for 10, 15, 20 years from now," not just current supplies.

Still, not all analysts perceived a security threat.

James Lewis, a technology transfer expert at the Center for Strategic and International Studies, said CFIUS should not have any concerns about a Unocal purchase.

"From a security perspective, it's as much of a threat as when the Japanese purchased (New York's) Rockefeller Center," he said by email.

© Reuters 2005. All Rights Reserved.
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