Unocal deal tests US stance toward China

Some lawmakers believe Chinese ownership of the oil firm would damage national security. Others see no harm.

Energy is a strategic commodity - and thus China's purchase of a US oil company would irreparably damage US national security.

That's the hard line taken by some key members of Congress as debate intensifies in Washington over a Chinese bid to buy California-based Unocal and its petroleum and pipeline assets.

Some deal opponents - such as former CIA chief R. James Woolsey - say it's "naive" to think that the proposed takeover is just a commercial matter, unrelated to a Beijing strategy for domination of energy markets and the Western Pacific.

Other experts retort that Congress is experiencing one of its periodic China scares, and that there is little danger in selling a relatively small oil firm to foreigners - even one with close ties to the Chinese government.

"The question you have to ask is whether there is risk to US security from this. I don't see that there is," says James Andrew Lewis, director of the Technology and Public Policy program at the Center for Strategic and International Studies (CSIS).

Whatever its outcome, the $18.5 billion bid for Unocal by the Chinese National Offshore Oil Corporation (CNOOC Ltd.) appears to have intensified feelings of ill-will that were already rising on both sides of the Pacific.

Last month the House, by a vote of 398 to 15, passed a resolution declaring that the deal would threaten national security. Last Wednesday Rep. Duncan Hunter (R), chairman of the House Armed Services Committee, said he might introduce a bill that would prevent the purchase. Congress enjoys the support of the public, 74 percent of whom oppose the deal, according to a Wall Street Journal poll.

Beijing, on the other hand, has complained that US lawmakers should stop interfering with a matter of business.

In Washington, opponents see the move as directed, not by market concerns, but by the desires of the Chinese government. CNOOC has lined up cut-rate financing for the deal from state-owned banks, they point out. In addition, CNOOC chairman Fu Chengyu doubles as a high-ranking Communist party official.

Unocal itself is a relatively small player in US markets, but it is a significant provider of natural gas to Southeast Asia and a primary investor in pipelines that cross Azerbaijan, Georgia, and Turkey.

"China's purchase of Unocal would dramatically increase its leverage over these countries and therefore its leverage over US interests in those regions," said Mr. Hunter at a House Armed Services panel hearing last week.

In addition, say opponents of the Chinese effort, Unocal owns sensitive undersea mining technology. For these and other reasons, critics say the deal should at least draw the scrutiny of the Committee on Foreign Investment in the United States, an executive branch interagency body created in 1988 to examine proposed sales of US firms for national security concerns.

But some complain the committee is not forceful enough. The body has only killed one deal in its 17-year existence, though others have been quietly headed off.

"A more aggressive oversight system should and will be needed if the Chinese accelerate their buying spree into the American economy," Richard D'Amato, chairman of the US-China Economic and Security Review Commission, told the House Armed Services Committee hearing.

Others have suggested conditions to the possible deal. James Andrew Lewis of CSIS says if Unocal ends up in Chinese hands, it should be forced to spin off its undersea mapping technology, although he adds that CNOOC has already indicated it would undertake this step. As to Chinese government involvement in the deal, that is besides the point, he argues. The real issue is the effect on US security concerns - and there he sees little problem.

Mr. Lewis and other experts note that Unocal is small, and the world oil market is a huge and efficient machine. If Beijing bought a Colombian coffee farm, would the House gear up to protect the US against a nationwide latte shortage?

"We need to try and not think of this in mercantilist terms," says Lewis.

Unocal represents 0.8 percent of US oil production, and 0.3 percent of consumption. Even if Beijing took all that petroleum for itself, the move would lessen the amount of petroleum that China would have to buy on the world market. The net effect on prices thus would be zero, according to Jerry Taylor, director of natural resource studies at the Cato Institute.