National security, China and the Unocal deal

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With oil prices recently piercing the $60-per-barrel level and the Pentagon expressing understandable concern about China's accelerating military build-up, national-security implications are clearly raised when a Chinese oil firm makes an unsolicited bid for 100 percent ownership of the ninth-largest U.S. oil company. Last month the China National Offshore Oil Corp. (CNOOC), 70 percent of which is owned by the self-proclaimed Communist Chinese government, made an $18.5 billion offer to purchase Unocal, the California-based oil and gas firm that controls 1.75 billion barrels of oil equivalent, mostly in Asia.

The offer was the latest manifestation of China's long-term "energy-security" policy. In addition to embarking upon a staggering nuclear-energy program, for which it should be commended, China has been busily buying energy resources around the world and signing long-term oil and gas contracts with state-controlled suppliers, including Iran and Sudan.

Ultimately, before China can take control of Unocal's assets, the purchase will have to be approved by President Bush. An agreement by Unocal to be acquired by CNOOC would trigger a review by the highly secretive Committee on Foreign Investments in the United States (CFIUS). CFIUS is a multi-agency task force created in 1988 to closely examine the national-security implications of foreign investments in U.S. corporations. Under the law that established the committee, the president has the ultimate authority to accept or reject any recommendation by CFIUS.

In testimony before the Senate Finance Committee about U.S.-Chinese economic relations on June 23, the day after CNOOC formally made its offer for Unocal, Treasury Secretary John Snow, who chairs CFIUS, said that he "would fully contemplate" that a CFIUS review would take place.

On the national-security front, there appear to be more than enough concerns to warrant an exhaustive review. "I think there is a fairly strong argument [in favor of blocking a CNOOC/Unocal deal] not simply because Unocal is a national asset," Thomas Donnelly, a defense expert who is a member of the U.S.-China Economic and Security Review Commission, told the Financial Times. "Part of the picture is also the strategic question of how China is approaching energy supplies," Mr. Donnelly explained. Reporting to Congress, Mr. Donnelly's commission analyzes the security implications of U.S.-Chinese financial relations. C. Richard D'Amato, the chairman of the U.S.-China Economic and Security Review Commission, told the Los Angeles Times: "When we're so dependent on foreign suppliers, giving away American sources of petroleum and hydrocarbons doesn't make sense." William Reinsch, who served as a senior export-control official in the Clinton Commerce Department, told the Wall Street Journal that CNOOC's "ownership of natural resources like this does raise national-security issues." Mikkal Herberg, director of the Asian Energy Security program at the National Bureau of Asian Research, a Seattle think tank, told the Los Angeles Times that Unocal has some "very, very good deep-water exploration skills" that could have military applications.

CFIUS was established at a time when there was great concern over acquisitions of U.S. corporate assets by Japan, which mostly concentrated on "trophy investments" like Rockefeller Center, the Pebble Beach golf course and Hollywood movie studios, most of which proved to be big flops. One Japanese merger proposal, however, was particularly problematic. In 1987, the year before CFIUS was created, a huge political firestorm over Japanese trade and investment erupted in Washington, forcing the cancellation of a highly controversial merger between Fairchild Semiconductor and the U.S.-based chip-making unit of Japan's Fujitsu. In the midst of that firestorm, a House committee proposed giving the president the authority to block foreign investments that were deemed to threaten national security. The next year, Congress passed the Exon-Florio bill, which created CFIUS.

Besides the Treasury secretary, the 12-member CFIUS includes high-level representatives from the White House, the attorney general, the U.S trade representative, and the secretaries of Defense, State, Homeland Security and Commerce. CFIUS, whose review does not commence until after a transaction has been completed, recently approved the purchase of IBM's personal-computer subsidiary by China's Lenovo Ltd. So far, after reviewing more than 1,500 cases, CFIUS's multi-agency process has formally rejected only one deal, the Wall Street Journal (WSJ) has reported. In 1990, then-President George H.W. Bush ordered a Chinese company to sell its interest in Mamco Manufacturing Inc., which built airplane components in Seattle.

Of the 1,560 cases considered by CFIUS since 1988, only 12 have made their way to a president for a final decision, the WSJ reported. Before CNOOC made its unsolicited bid, Unocal had already agreed to be acquired by Chevron, the second-largest U.S.-based oil firm. If the Unocal-Chevron deal is consummated, CNOOC obviously will not complete its transaction, and the CFIUS process will not be triggered. Not this time, at least. Eventually, however, China's insatiable appetite for oil and gas will require the U.S. government to decide whether America's national security is threatened by China's purchase of oil and gas reserves owned by U.S. corporations.