Chinese Go on Tiptoes to The US

(Dow Jones Newswires), Oct. 11, 2010

The Chinese are coming, but this time they shouldn't scare the horses.

Cnooc's $1.1 billion purchase of a 33.3% stake in one of Chesapeake Energy's shale-oil and gas fields marks the first investment by a Chinese company into onshore U.S. energy assets. The landmark comes five years after Cnooc's previous foray across the Pacific: its controversial bid to acquire Unocal.

Political hostility toward the Unocal bid has made Chinese oil-and-gas companies reluctant to pursue investments in the U.S. ever since. Indeed, the episode long poisoned the atmosphere for U.S.-China mutual direct investment across all sectors.

There's little reason why Cnooc's approach this time should raise so many hackles. A minority stake in one project can hardly be spun as a threat to U.S. national security, especially as Chesapeake will retain full operational control of its Eagle Ford shale field assets.

Moreover, the U.S. company has prepared the ground well, having spoken for a while about introducing Asian investors: Sovereign-wealth fund China Investment Corp. put money into the company in June alongside its counterparts in Singapore and Korea. Chesapeake's news release Monday emphasized the benefit to local jobs and tax revenues that the Cnooc deal will bring.

Of course, since 2005 financial clout has swung Asia's way, particularly to China. Debt-laden Chesapeake could do with the cash Cnooc is able to bring to the table. For the Chinese company, this investment, which could rise to $2.16 billion over two years, is eminently affordable.

Whether it will make a decent return for Cnooc is less certain, with gas prices at low levels in the U.S. right now. Those at least make the stake look cheap. Gordon Kwan at Mirae Asset Securities says the acquisition costs are around half the market value, per barrel of oil equivalent, of Cnooc's existing proved reserves.

At a time when Cnooc is finding domestic expansion opportunities hard to come by, looking for deals abroad makes sense, and Cnooc may hope to get some technology transfer out of this stake buy, too. Assuming the U.S. lets Cnooc go ahead this time, its decision to dip a toe in the country could well lead to more.

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