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The Associated Press June 28, 2005

Experts say security threats not clear in CNOOC bid for Unocal

By Brad Foss

WASHINGTON - The prospect of a Chinese oil company gobbling up an American one has stirred up fears that U.S. energy and national security are at risk, yet the supposed dangers - that China will hoard energy resources or use drilling technology for military purposes - appear far from certain.

In yet another volley against the bid, two Texas congressmen urged President Bush on Tuesday to oppose CNOOC Ltd.'s $18.5 billion bid for El Segundo, Calif.-based Unocal Corp., arguing that "this transaction poses a clear threat to the energy and national security of the United States." Two other letters signed by lawmakers have raised similar concerns.

But experts on Asia, energy and national security contend that while the implications of the offer for Unocal deserve serious consideration, they are anything but clear.

CNOOC said when it made the offer for Unocal that it was prepared to negotiate the divestiture of certain Unocal assets that U.S. officials deem too important to national security.

Such assets could include Unocal's stake in the Colonial Pipeline, which delivers fuel from the Gulf Coast to the Northeast, as well as oil terminals it owns that feed into the nation's Strategic Petroleum Reserve, according to a source familiar with talks taking place in New York on Tuesday between the two companies. The source spoke on condition of anonymity.

Still, the red flags that members of Congress have been raising about the dangers the United States would face if this deal were to go through have been "oblique and ambiguous," said Eric Heginbotham, an expert on Asian foreign policy and military strategy at the Council on Foreign Relations in Washington.

"And to the extent that people have tried to flesh them out," he added, "the concerns tend to be grossly exaggerated."

The top concern is that CNOOC's bid for Unocal is part of a broader strategy by communist China - a considerable financial backer of the deal - to hoard energy supplies before they run out.

"The Chinese government is going after these energy supplies to control them and lock them up," said Richard D'Amato, chairman of the U.S.-China Economic and Security Review Commission. D'Amato said the amount of oil and natural gas produced by Unocal - less than 1 percent of U.S. consumption - may not be enough to cause alarm, but he's worried that after a couple more deals like this one China's oil industry will have a worrisome level of influence in the market.

"At what point do you say that they can't control any more oil because it's in our national interest? That's why you have to take a hard look at this deal."

Economists concede D'Amato's latter point about using this as an opportunity to consider longer-term issues, but they also dismiss his underlying fear for two reasons: oil is a fungible commodity that CNOOC is likely to trade to accumulate wealth and, even if China does decide to use Unocal's production for itself, it means the country will be that much less dependent on other supplies that the U.S. and others would consume.

"It frees up comparable barrels to move elsewhere," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation in New York.

The other major source of concern for those opposed to CNOOC's bid for Unocal is that the U.S. might unwittingly give away technology or assets that have military value.

In the letter they sent to President Bush on Tuesday, Reps. Joe Barton and Ralph Hall alluded to "highly advanced technologies" that Unocal and other energy companies use to drill for oil and natural gas that could also be used for military purposes.

"Given the potential military threat posed by China to our allies in Asia and our security interests, it is of the utmost importance that U.S. export control laws be strictly applied to ensure that no sensitive technology falls into the hands of the Chinese government - or, though China, other more dangerous regimes around the world - which can later be used to undermine our national security."

A Chinese oil official attending a U.S.-China oil and gas meeting in New Orleans on Tuesday said such concerns were not reasonable.

"It's unbelievable," Zhang Guobao, vice chairman of the National Development and Reform Commission, was quoted by Dow Jones Newswires as saying. "It's difficult to understand that there is such a position. Many U.S. companies also have investments in China, and we also think it is just business."

Although the letter did not specify how oil exploration technology could be used militarily, experts in Washington said the security fears stem from the oil industry's use of sonar and other tools for underwater mapping of geological structures.

Heginbotham said some officials in Washington might be concerned that these technologies could be used in submarine warfare.

D'Amato said another potential worry is that sophisticated deepwater drilling technologies could enable an ally of China - say, North Korea - to test a nuclear weapon deep in the earth's core without being discovered.

John Pike, a defense analyst with GlobalSecurity.org, said the threats themselves sounded dubious and that fears of the Chinese "pulling a fast one" were not based in reality.

These are the kinds of issues that get worked out by the Committee on Foreign Investment in the United States, so "there's no way that they would be able to sneak off with something because nobody noticed," Pike said.

CNOOC CEO Fu Chengyu said in a letter sent to Congress on Monday that he anticipated the deal would warrant scrutiny by CFIUS and that he wants any review to begin "as soon as possible."

A CFIUS review would only be necessary if Unocal calls off its tentative agreement to be bought by Chevron Corp. for $16.6 billion and instead agrees to CNOOC's offer.

"Often times, these things end up with a negotiated settlement," said William Reinsch, a high-ranking Commerce Department official in the Clinton administration who is now president of the National Foreign Trade Council.

Reinsch said the national security question likely to receive the most attention by CFIUS is what CNOOC's proposed purchase of Unocal says about the Chinese government's long-term philosophy about oil markets.

"If supplies were tight, would they in fact sell it to the highest bidder, or lock it up for home party use?"


Copyright 2005, The Associated Press