CNOOC – Unocal: A Strategic Perspective for Southeast Asia

China's acquisition of Unocal might be more than a bid for more oil to feed Chinese economic growth. The purchase might be a strategic ploy by the Chinese government to become the leading supplier of natural gas to several key economies in Southeast Asia, and to use the natural resources in the area as leverage in its quest for expansion and power projection.

The view of many in Congress of the CNOOC bid for Unocal is that China is planning on taking over the United States energy industry and that the buyout of Unocal would be a threat to the national security of the United States. But the possibilities are much more complex and complicated than that.

The Wall Street Journal notes the following: "such a deal probably would do little to resolve China's most pressing energy needs -- and even less to disrupt the flow of oil to other markets. Much of Unocal's Asian production is tied up in contracts with Thailand and other nations. That means it is highly unlikely those supplies could be diverted to China for years, if ever. In other cases, China would wind up buying assets whose production it would have bought anyway, even if those assets were owned by rival Unocal bidder Chevron Corp., analysts and industry executives in the region say."

More interesting is the notion that China is not making a very smart play based on its needs for oil, since Unocal "isn't a major player when it comes to crude oil, the one commodity China is especially keen to buy. Instead, Unocal's Asian assets are weighted heavily toward natural gas, an important and hard-to-transport energy source that is relatively plentiful in the region."

According to the Journal "Cnooc says it has no intention of disobeying market demand, and analysts say the company may be just as likely as Chevron or Unocal to sell oil and gas to countries other than China. The bid for Unocal has ["little to do with security of supply for China,"] says Derek Butter, an analyst at energy consultancy Wood Mackenzie in Edinburgh, Scotland. Instead, he says, it has more to do with China's desire to create a large corporation that ["can compete with the other international companies, and has the skills in the future to negotiate its way into large projects."]"

The bottom line, according to this alternative point of view is that China's bid for Unocal is a bid toward becoming a major oil producer with a global presence, rather than to add to China's reserves for its own personal use.

What makes no sense is why China would want to become a competitor to Exxon instead of improving its own domestic situation through the addition of geographically sensible reserves.

The only conclusions are that China doesn't really know what it's getting into, that it's getting bad advice from Goldman Sachs and the rest of its American advisors on the Unocal deal, or that there is something deeper involved in its quest for Unocal. In our opinion, the latter is the more likely case.

Here are three interesting facts put forth by the Journal:

  1. "In the case of Thailand, all of Unocal's gas production is committed to a single Thai buyer. The gas is committed through long-term sales agreements that have expiration dates ranging from 2010 to 2029. Even if those contracts weren't in place, it would be difficult and costly for China to send the gas elsewhere because the pipelines or other infrastructure to do so don't exist. Building such infrastructure likely would require the consent of the Thai government, which relies on Unocal's gas to fuel its booming power sector."
  2. "The idea that China might build a gas terminal to ship liquefied Thai gas to China ["is absolutely preposterous,"] says John Vautrain, a vice president and director in Singapore of Purvin & Gertz, a Houston oil and gas consultancy. ["The Thais wouldn't let you."]
  3. "Unocal's Myanmar output also is sold to Thailand. Its Bangladesh gas generally is reserved for Bangladeshi consumption. The picture is somewhat different in Indonesia, where Unocal holds interests in a number of promising fields whose output probably would be earmarked by Cnooc for the China market, according to people familiar with the company's strategy."

In our opinion, the Journal, while clearly listing some interesting observations is missing an important point.

China's purchase of Unocal, even if it did not lead to the diversion of natural gas toward its own borders, would give it control of the energy supply used by Thailand, Myanmar, Bangladesh, and Indonesia. It would also put some pressure on Japan and South Korea.

In other words, in one fell swoop, China would become the energy czar for a significant portion of South East Asia, and would gain valuable leverage with which to further its other goals, the expansion of its influence, and the ability to project its power. A scenario in which China could use its leverage to gain concessions from the four countries mentioned, including the placement of military bases, fueling stations for submarines and merchant ships, and the placement of surveillance equipment and communication relay stations in all of those countries is an easy next step to visualize.

All the while, China could also make money by continuing to sell energy to those countries by honoring existing contracts, while negotiating more lucrative ones in the future.

Indeed, the Unocal purchase can easily be looked upon as a threat to national security, especially if you live in Thailand, Myanmar, Bangladesh, Indonesia, Japan, or anywhere else in Asia.

Oil Market Summary And Outlook: Drifting Lower

Supply data surprised traders as crude oil, gasoline, and distillate inventories built up. Traders expected the latter two to rise in stockpiles, but were expecting crude to fall. There was a larger than expected rise in imports cited as the cause for the build up. Refinery capacity is tight, and demand remains robust.

Still, on 6-27 in this space we noted that while some were calling for $100 oil, others were more cautious. We noted the following: According to the Wall Street Journal "Their take: Oil is headed lower -- a lot lower. For several years, this small group of analysts, industry observers and even some oil-company executives has argued that demand for crude oil relative to its supply doesn't justify record high prices, which have climbed about 60% in the past year."

The bullish argument is based on the following: "new fields that should begin producing oil in the next few years as well as the growing prominence of alternatives to traditional crude, such as the massive, oil-laden tar sands in Canada. Others in the bear camp insist oil markets no longer spook easily over geopolitical fears such as Middle East instability.

The key is still what happens at the $60 area for crude and the 900 area for the XOI. If they both finish the week above those key prices, next week could be a very tough week for those wishing to see lower oil prices.

If there are no breaches of these key chart areas, we could see a push toward $70 in the next few days. A break below 56.91, could lead to prices testing the 52 area.

The Philadelphia Oil Service Index (OSX) pulled back, but is still holding above key support. The index delivered a major break out last week, but pulled back on Tuesday.

The Amex Oil Index (XOI) is still within reach of all time highs. The 900 area is critical.

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