Bill Totten's Weblog

Saturday, October 22, 2005

CNOOC to the Left of Me, Chevron to the Right:

Stuck in the Middle with Fu

by Blaine Townsend (October 2005)

When President Richard Nixon visited Beijing in 1972, he could never have dreamed the Communists would one day bid against Chevron Corporation for Unocal. It just goes to show that if you gather enough capital today (even at the expense of human rights, American national security and the environment) you can be a player in the energy business. At least that's how Chevron and Unocal did it. The trick now is to get Fu Chengyu's Chinese National Offshore Oil Corporation (CNOOC) to buy Chevron. Then shareholders could take the money and invest in companies that will actually help this country.

After all, what would America be losing if CNOOC succeeds in acquiring Chevron (or succeeded in buying Unocal)? It wouldn't mean a less secure oil supply for America. CNOOC's bid for Unocal doesn't necessarily pass the free market sniff test, but Chevron's bid is not about securing oil for America either. If the market for oil is better in Shanghai than Cheyenne, the oil is going to Shanghai.

In fact, a Sino-mega merger might actually hasten the end to America's dependence on oil. Chevron and Unocal are no more interested in ending this quagmire than is CNOOC. With two fewer American oil companies to stifle policy, the markets would reach oil independence more rapidly.

It's also not as if these companies are buffeting America's national security efforts. Quite the contrary. From Burma to Africa to South America, Chevron and Unocal have built empires by rushing into unstable regions and getting oil or gas out as quickly as possible. This has enabled the companies to stockpile cash, but as we are finding out in these first fitful years of the 21st century, it may be at the expense of America's national security.

In Nigeria, for example, Chevron has relied on a partnership with a violent, undemocratic regime to derive a significant share of its crude oil supply. Chevron got its oil, but it left behind no lasting democratic institutions in the county. So now, after more than a decade of producing oil, Nigeria has social unrest in the South and Sharia (the imposition of Islamic Law) in the North. This is a poisonous combination for American national security because thugs in Nigeria hijack an estimated $3 billion to $15 billion of oil each year. To Chevron, this is just the cost of doing business in Nigeria. But with the proceeds from the stolen oil almost certainly falling into the hands of anti-American interests in the region, it may be America that pays the price.

And Unocal? When Chevron CEO David Reilly wrote in a Wall Street Journal editorial on July 12th that Chevron and Unocal shared "a strong cultural affinity", he wasn't kidding. In the late 1990s, Unocal tried desperately to go into the oil pipeline business with the Taliban in Afghanistan, hoping to put $250 million into the hands of the Taliban pre-9/11. Now it is Unocal's stake in pipelines just north of Iran that has attracted suitors. Protecting these assets from militants in the region won't come cheap. And if it's Chevron that gets Unocal, this is how it will work: American taxpayers will be stuck paying to protect pipelines in the heartland of America's enemies (diverting resources from schools, emergency services or the development of alternative energy); Chevron will get the profits (which are then lightly taxed); and China will most likely get the oil anyway.

So you see, letting CNOOC have Unocal (and maybe Chevron too) might be good for shareholders and America. Shareholders would be ridding themselves of considerable human rights and environmental liabilities and with the subsequent recovery of billions of dollars in direct and indirect oil subsidies, America could put real resources into developing cleaner, stable sources of energy. Plenty of wealth would be created; it would just be spread among hundreds of smaller innovative companies (many in new industries) and among many more Americans.

Of course, when that happens, we won't have Big Oil to push around any more.

Blaine Townsend
Trillium Asset Management
Investing for a Better World
The Source for Social Investors Since 1982

Bill Totten


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