The Tug of War: Realism and Liberalism in CNOOC’s Bid for

Unocal

Tsung-yen Chen

MA Student, East Asian Studies

Stanford University

Center for East Asian Studies

Stanford University

100 Encina Commons

615 Crothers Way

Stanford, CA 94305-6006

tzeng69@stanford.edu

Introduction

Since the late 1970s, China has begun a period of high economic growth and

experienced the increasing demand for energy. Energy is a critical resource for supporting

China's economic development that can be seen as the blood vessel of economic

development. With surging oil demand, China, in the near future, will consume the most

volume of petroleum. The domestic oil production in China, since 1993, hasn’t been able to

sustain domestic demand. In order to deal with the foreseeable oil shortage problem in the

near future, Chinese government in the late 90s has restructured the three biggest national

oil companies1 (NOCs) and actively encouraged them to seek overseas investment, such as

proposing initial public offering (IPO) in Hong Kong, investing funds in constructing

infrastructures in developing countries with abundant resources, cooperating with foreign

governments to explore and excavate in new areas with energy reserves, or merging foreign

oil companies. China’s expanding strategy of energy policy has alarmed other countries

that China’s quest around the world will endanger the energy security around the world.

U.S. government is sensitively concerned about China’s overseas investment on the

energy industry, being anxious that China’s expansion will eventually harm the national

interest and energy security. Some borrow the concept of realism of international relation

theory to explain China’s overseas economic behaviors!, understanding such actions as the

zero-sum game that China’s gain will be America’s loss. Beijing might use oil as a weapon

1 The three major oil companies mentioned here are China National Petroleum Corporation (CNPC), China

Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC). After restructuring in 1998, CNPC controls most assets of energy industry in the north and west of the contry;

Sinopec controls assets in the south and east; CNOOC controls off-shore assets. 2 “China’s energy-related actions reflect its distrust of international oil markets” quoted in “2007 Report to

Congress of the U.S.-China Economic and Security Review Commission,” U.S.-China Economic and Security

Review Commission, November, 2007, p.175.

trying to influence the world. In addition to hawkish realism, some people introduce the

idea of liberalism trying to explain China’s behavior from a different angle. They see

China’s funds as benefits to help developing countries explore their energy reserves. As a

consequence, there will be more sufficient energy supply in the international market and

this will, in fact, strengthen U.S. and the world energy security. Besides, China’s entering

international market will potentially encourage the democratization in China". This, in the

long run, will accord with U.S. national interest.

In the mid 2005, these two divergent views underwent a great debate while China

National Offshore Oil Corporation Ltd. (CNOOC) was trying to merge Union Oil Company

of California (Unocal), based in California. Receiving a huge amount of low interest loan

from its parent company, which was controlled by the Chinese government for holding

more than 70% of shares, CNOOC tried to outbid Chevron by 1.4 billion dollars4. To the

realist, if CNOOC, controlled by the government, would infringe U.S. national interest,

especially when China was seen by the Bush administration as a “strategic competitor#”. If

U.S. clashed with China in the future, selling an oil companies to China would reduce

energy sources, hence harming U.S. energy security. However, the liberalism thought U.S.

government shouldn’t meddle in this deal. They argued that only 10% of China’s foreign

oil sources went back to China, the rest of them went directly into international market$.

With more oil in the market, it is less likely to see international conflicts on oil resources.

3 Aaron L. Friedberg. “The Future of U.S. – China Relations: Is Conflict Inevitable?” International Security,

Vol. 30, No. 2 (Fall, 2005), p. 15. 4 In this merge case, CNOOC, compared with the 17.1 billions in cash and stocks offered by Chevron, offer

18.5 billions in cash to buy the UNOCAL. 5 “Remarks by the President at American Society of Newspaper in the J.W. Marriott Hotel,” Office of the

Press Secretary, April 5, 2001. http://www.whitehouse.gov/news/releases/2001/04/20010405-5.html 6 David G. Victor, “What Resource Wars?” National Interest, Nov/Dec 2007, p.48.

Therefore, the liberal encouraged Chinese oil companies to participate in overseas oil

investments.

In this paper, I endeavor to adopt two divergent views of international relation,

realism and liberalism, to discuss the dynamic of the policy outcome behind CNOON’s

failed attempt to merge UNOCAL and why U.S. government in the end tried hard to block

CNOOC’s offer that was more profitable to shareholders of Unocal7. First, I discuss

China’s foreseeable energy shortage problem and its quest for oil overseas. I also focus on

the relation between oil companies and government. The reality discussed in this section

was the foundation to understand the policy outcome in this case. Secondly, I lay out three

most important demand sides for the policy. They include Chevron, CNOOC and the blue

team (a loose coalition supporting hard-line policies toward China). All of them exerted

pressures in order to influence the policy. In the third part, I introduce the supply sides of

policy in this case, which consist of the US Congress and White House, analyzing their

attitude toward this case. Fourthly, I use realism and liberalism to explicate the framework

and content of American policy toward China in this case and, furthermore, to analyze how

these two concepts influence the policy outcome. Finally, I argue that both views are

helpful for us to understand the policy making. However, if we incorporate ideas stressed

by the constructivist theory, we will be more accurate to assess China’s overseas expanding

behaviors.

7 Fu, Chengyu, the chairman and CEO of CNOOC Ltd., asserted in his article that CNOOC would be good for

Unocal's shareholders for its profit-seeking principle. See Fu, Chengyu. “Why Is America Worried?” Wall

Street Journal, July 6, 2005.

Energy Profile of China

In order to understand why CNOOC’s attempt failed, we need to first understand

the current energy profile of China, which serve to be the foundation of perspectives from

each contending side. This will help us realize the opinion inputs the government received,

therefore understanding the dynamic of policy making in this case. In this section, I

illustrate the situation of surging demand for oil in China, China’s overseas ambition for

securing oil sources and the relation between national oil companies and the central

government.

China’s Surging Demand for Oil

After discovering the Daqing oil field of Heilongjiang Province and Shengli oil

field of Shangdong Province in the 60s, China remarkably increased her oil production.

Outsiders were optimistic about China being a major oil exporter in the near future. In 1973,

China, as expected, started to generate oil surplus for export. Scholars, at that time, were

arguing about how China would leverage the international politics by her oil weapon. In

addition, the extremely lucrative oil revenue, caused by the high oil price during the oil

crisis, would mend her situation of high trade deficit with major countries in the world8. In

those experts’ eyes, China would become a major oil power.

8 Park, Choon-ho and Jerome Alan Cohen. “The Politics of China’s Oil Weapon,” Foreign Policy, No.20

(Autumn, 1975), pp. 28-49.

Figure 1. China’s annual net oil import from 1980 to (Sources: BP Statistical Review of World

Energy June 2007)

While China started to experience phenomenal economic development in the late

1970s, the consumption on oil increased dramatically. The growth of oil production,

therefore, couldn’t keep up with the economic development (see figure 1). While the

growth of oil production has grown 38 percent from 1978 to 1993, the gross domestic

production (GDP) has grown around 250 percent%. Just twenty years later, China could no

longer fulfill the oil consumption by its domestic production. In 1993, the first time after

the economic reform, China’s domestic oil demand surpassed production, which meant that

China became a net oil-importing country, from importing 56 thousands barrels per day

(bpd) to 3.4 millions in 2006 bpd from abroad&'. In 2003, China became the world’s second

9 data and figure needed 10 The data is from China Energy Profile in the Energy Information Administration.

http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=CH

largest consumer of oil behind the United States. A year later it was the number three

importer of oil after the United States and Japan&&. Between 2000 and 2005, China was

responsible for about one quarter of the growth in world oil demand&!. It is projected,

however, that the oil import will account for 57% of total oil consumption in China in 2010,

and 74% in 2025&". In the near future, China will depend on oil import desperately and such

anxiety to securing sufficient oil has been driving China’s quest for overseas expansion.

China’s Quest for Oil Overseas

Facing the surging demand for oil, government can design policy incentives to

influence the way people consume energy, that is, to emphasize on the demand side of

policy, which may encourage people to use energy in more efficient ways. This will save

energy and decrease the degree of energy dependence. In addition, government can also

increase the energy supply, such as exploring domestic oil reserves or securing oil sources

abroad in an attempt to satisfy surging domestic demand. At the turn of the century, there

were debates inside the China’s policymaking circle of which strategies should China adopt

to manage the energy problem. They proposed that, in order to protect China’s energy

security, they should initiate government-dominated policies and focus on securing oil

supply. There are three main concepts, which included “Overseas Investment”,

“Transitional Oil Pipelines” and “Oil Diplomacy”&(. According to these ideas, Beijing and

11 The data can be found in Energy Information Administration. http://tonto.eia.doe.gov/country/index.cfm 12 Erica Downs, “Energy Security Series: China,” The Brookings Foreign Policy Studies, The Brooking

Institution, Dec. 2006, p. 1. 13 Lee, Pak K. “China’s Quest for Oil Security: Oil (Wars) in the Pipeline?” The Pacific Review, Vol. 18, No.

2 (June, 2005), p. 268. 14 Erica Downs. “The Chinese Energy Security Debate,” The China Quarterly, Vol. 177 (2004), pp. 32-39.

oil companies actively went abroad to invest in overseas oil industries, hoping to abate the

interference coming from the energy supply side.

In overseas investment, China, since 1992, has begun actively investing in natural

resources and infrastructures in many developing countries&#. Among them, the most

controversial cases that worried the Bush administration the most were projects in Sudan,

Venezuela and Iran. China National Petroleum Corporation (CNPC) has invested in Sudan

since 1996 after western oil companies left due to civil wars and terrorism. The void was

then filled by funds, totaling 4 billion dollars, from China. These projects focused on

exploring and excavating oil reserves and infrastructures. In addition, Chinese government

also helped Sudanese government develop the military industry, exporting armament to

Sudan. China thus became the biggest investing country to Sudan around the world&$.

However, this also alerted the world that China’s funds in Sudan might exacerbate the

unrests and human right conditions. In Latin America, China’s investment in Venezuela

aroused great concern in the U.S. government. Hugo Chavez, the president of Venezuela,

maintained friendly relationship with communist regime in China. He welcomed China to

go Venezuela for exploring new energy reserves&). Chavez, in September 2006, invited

China with high profile and promised for increasing oil export to China from 155,000

barrels per day (bpd) to 500,000 bpd in 2009, and 1 million bpd in 2012&*. In the Middle

East, China has started to invest in Iran since mid 1990s. In October 2004, China Petroleum

& Chemical Corporation (Sinopec) signed a 100 billion deal with Iranian government,

15 Ibid., p. 34. 16 Anthony Lake and Christine Whitman. “More Than Humanitarianism: A Strategic U.S. Approach Toward Africa,” Council on Foreign Relations, 2006, pp. 43. 17 Stephen Johnson. “Backgrounder: Balancing China’s Growing Influence in Latin America,” The Heritage

Foundation, October. 24, 2005, pp.3. 18 John Chan. “China’s oil diplomacy: Hugo Chavez makes high profile visit to Beijing,” New York Times,

September 6, 2006.

allowing China to import a further 250 million tons of LNG from Iran's Yadavaran oilfield

and providing China with 150,000 barrels per day of crude oil over a 25-year period&%. Most

of the time, China adopted similar strategies in order to secure “equity oil!'”, which can

guarantee China to obtain enough overseas oil to feed domestic demand.

Investing in transitional oil pipelines, China expected to build pipeline to connect

oil production sites in Central Asia and Russia with China’s refineries. Because China

doesn’t possess a strong navy force to protect the nautical transportation for oil tankers,

importing oil through pipeline will prevent harassment from U.S. navy or pirates. In

addition, if other countries intend to harm China’s energy delivery, they have to attack

pipeline in Chinese soil or the third country. This will cause serious international conflict

and increase tremendous cost for belligerent states, therefore abating their intention for

attacking pipeline!&. In this sense, China has sought actively to invest in pipeline

construction to evade the future interference from international arena!!. In the process,

China faced serious contention from Japan in pipeline construction that traverses Central

Asia. Japan saw China’s surging oil demand as a threat and consequently struck a

cooperation agreement with four Central Asian nations – Kazakhstan, Kyrgyzstan,

Uzbekistan and Tajikistan, using economic aid in exchange for energy supply!". Beside,

China and Japan respectively back the Angarsk-Daqing and Angarsk-Nakhodka pipeline

routes24, seeking cooperation with Russia to benefit from the geopolitical advantage!#.

19 Jephraim Gundzik, “The ties that bind: China, Russia, and Iran,” Asia Times, June 4, 2005,

http://www.atimes.com/atimes/China/GF04Ad07.html 20 Erica Downs. “The Chinese Energy Security Debate,” The China Quarterly, Vol. 177 (2004), p. 35. 21 Ibid., p. 37. 22 Pak K. Lee. “China’s quest for oil security: oil (wars) in the pipeline?” The Pacific Review, Vol. 18, No. 2,

pp. 265-301. 23 Ibid., 283 24 Ibid.

Because securing enough oil became a critical issue in China, maintaining reliable

oil sources, thus, became a force to drive China’s foreign policy since then. In order to

strengthen energy cooperation with other states, Beijing has exerted much resource in

carrying out intensive oil diplomacy to facilitate oil companies’ overseas investment.

Beijing has actively promoted the Shanghai Cooperation Organization, hoping to develop a

secure, stable, and peaceful regional framework with countries from central Asia!$. Besides,

Chinese government held the Beijing Summit of the China-Africa Cooperation Forum in

November, 2006, inviting African leaders to the capital and reached an agreement of

developing a new type of strategic partnership, featuring political equality, mutual trust,

mutually beneficial economic cooperation and cultural exchanges. President Hu Jintao’s

visit to Africa, his third times since ascension, was seen as the means to protect China’s oil

interest in Africa. Many believed that the motivation behind the ambition of building

partnership with those regions was to sustain the energy security and diversify the sources

of oil import.

The Ambiguous Relation Between Oil Companies and Chinese Government

Understanding the relation between Chinese oil companies and government can

help us realize the dynamic behind overseas investments. Chinese oil companies were

always criticized for its intimate relation with Chinese government. And Chinese

Government was accused of exerting great control on them. As mentioned above, states

25 Richard Giragosian. “The Sino-Japanese pipeline struggle,” Asia Times, Oct. 18, 2005.

http://www.atimes.com/atimes/China_Business/GJ18Cb02.html 26 Yuan, Jing-Dong. “China and the Shanghai Cooperation Organization,” Polotologiske Studier, Vol. 6, No.

2 (September, 2003), pp. 128-139.

that Chinese oil companies aimed at are always the targets that the Bush administration

condemns, blaming China to be the accomplice that endangers U.S. national interest and

universal value!). NOCs’ expansive intention is seen as the extension of Beijing’s will for it

control dominant shares of NOCs. However, some argued that behaviors of Chinese oil

companies were not driven by politics. They argued that since 1990s after corporate reform,

maximizing profit has dominated Chinese NOCs’ thoughts!*. They considered the overseas

expansion of China’s NOCs was not driven from the “top-down” but rather from the

“bottom-up.” The government transferred the resources and power to the NOCs and

overseas expansion was decided by the leaders of NOCs and the government often just

acted as subsidiary!%. The divergent views of such relation are critical of how to observe the

implication of NOCs overseas expansion.

In the initial stage, international oil companies (IOCs) dominated the world oil

industry. For governments of oil-producing countries’ unfamiliar with the industry, adding

that it was hard to know how lucrative the profit that IOCs obtained, the problem of

information asymmetry thus emerged between IOCs and oil-producing countries. While oil

price surged during the oil crisis, as a consequence, oil-producing countries expecteded to

establish NOCs to control the benefit coming from natural resources30, rather than being

deceived by IOCs. In the past decades, to IOCs, the price paid for entering the other state’s

energy industries has been increasing because each country’s NOCs and government,

especially in the developing world, tightly control oil reserves in order to restrain

27 Dexter Roberts. “The Squeeze on PetroChina,” Business Week, Feb 28, 2008. http://www.businessweek.com/magazine/content/08_10/b4074028093921.htm 28 Fu, Chengyu. “Why Is America Worried?” Wall Street Journal, July 6, 2005. 29 Erica Downs. “China’s Quest for Overseas Oil,” Far Eastern Economic Review, Sep., 2007, p. 53. 30 Dag Harald Claes. “Globalization and State Oil Companies: The Case of Statoil,” The Journal of Energy

and Development, Vol. 29, No. 1, p. 44.

investment from abroad. China in the late 90s, a period that oil price dropped, has started to

restructure NOCs, dividing oil industry to three major NOCs"&. Beijing understood that, in

order to sustain domestic demand, they need NOCs to go abroad seeking for more oil

supply. They hope to increase the degree of NOCs’ autonomy and managerial power for the

sake of improving their global competitiveness. Though government still held the dominant

shares of NOCs, it encourage NOCs to raise funds in foreign capital markets by initial

public offering (IPO)32 that was learnt from the advanced idea of corporate governance in

the western society. As oil price hovering around 100 dollars per barrel recently, we can

predict that Beijing will have more incentives to control NOCs once the equity oil overseas

starts to earn a huge amount of oil revenue. In this sense, we might foresee that China will

exert more control on NOCs.

According to Erica Downs’s analysis, the most important stakeholders in the

making of Chinese energy policy are NOCs, State Development Planning Commission

(SDPC), State Economic and Trade Commission (SETC), the Ministry of Foreign Affairs

(MFA), the military and the think tanks"". Among them, due to lucrative revenue and the

closed relation with top elites, NOCs could exert great influence on the energy policy.

However, the power of decision-making was held in the hands of SDPC and SETC.

Leaders of NOCs were appointed by the government"(, and they also served as Secretaries

31 See footnote 1. 32 China National Offshore Oil Company Ltd (CNOOC) kick off its US$1.1-US$1.4 billion overseas listing campaign by opening 5 per cent of its IPO to retail investors in Hong Kong in 2001. 33 Downs, 2004, pp. 25-28. 34 “fu cheng yu bei ren ming wei zhong guo hai you zong jing li dang zu shu ji (fu cheng yu is appointed as

the CEO and Party secretary of CNOOC),”CNOOC Briefing Office, October 16, 2003.

http://winwin.redcome.com/servlet/Report?node=12040&language=1

of Party Committee"#. They helped government monitor the NOCs’ direction, making sure

they wouldn’t contradict the communist ideology. Because the government was unfamiliar

with oil industry, it tended to appoint experts of oil industry to lead the NOCs. It seemed

that Beijing respected the professions, willing to let professionals make the decision and

reducing governmental control. Most of these experts, however, treated their posts as the

channels to enter the central leading group in Beijing. Consequently, if Beijing asked NOCs

to follow its policy, it would be hard for these professional leaders in NOCs to disregard the

pressure from the top. NOCs had to leverage between political and economic issues rather

than making decisions purely based on economic consideration"$. Though Chinese NOCs

asserted that politics was not their consideration, they couldn’t get rid of the reality that

government was the biggest shareholder and the intimate relation between them. In such

structure, we can argue that if government tries to control NOCs’ corporate policy in the

future, they are too weak to escape from the influence of Beijing, especially when leaders

of NOCs will risk of being replaced and failing to enter central elite group if they disobey

instructions from the top.

Policy Demand Side

After realizing China’s surging demand for oil and how it response to this concern,

then we can analyze the demand side of policy in the CNOOC’s case based on the energy

35 According to CNOOC’s Chinese website, there are seven party secretaries being appointed as top leaders and one member of the Chinese People's Political Consultative Conference. In the English version website,

however, there is no information regarding to their political affiliation.

http://www.cnooc.com.cn/zhyww/gsjj/ldml/ldcy/default.shtml 36 Daniel H. Rosen and Trevor Houser. “China Energy: A Guide for the Perplexed,” China Balance Sheet,

Peterson Institute for International Economics, May 2007, p. 19.

profile of China. I consider that there are three most important actors in this case, which

includes two rival oil companies, Chevron and CNOOC, and the “blue team” that exerted

great influence in political arena of Washington. These group, based on the current China’s

behavior discussed above, hope government to output policies that benefited them or to fit

into their views about China.

Rival Competitors: Chevron and CNOOC

Chevron was the biggest rival competitor standing in CNOOC’s attempt to acquire

Unocal. Both of them put in a large portion of resources to hire top lobby firms to affect

Washington’s policy outcome in favor of their intention respectively to merge Unocal. To

Chevron, they preferred Washington could meddle in the deal to block CNOOC from

entering the market. CNOOC, in the other hand, hoped government could stay out of this

deal, letting market mechanism to make the final decision, the idea that was literally

embraced by the U.S. government. If there is no government intervention, CNOOC

believed that the board of Unocal would accept CNOOC’s offer for financially being more

lucrative to their shareholders.

From the Chevron side, they successfully adopted the idea of China’s threat of

becoming a rising power, the idea that evoked protectionism37 in Washington. They hired

Federalist Group as their lobbyists, based in Washington, to input China’s negative image

to policy circle in Washington. The principal of Federalist Group, Wayne Berman, was an

official from Commerce Department in the first Bush administration and also a big fund-

37 Francis Schortgen. “Protectionist Capitalists vs. Capitalist Communists: CNOOC’s Filed Unocal Bid in

Perspective,” USF Center for the Pacific Rim, Sep. 2006, pp. 2-10.

raiser for President Bush. Another member Chevron hired in Federalist Group, Drew

Maloney, was a former top aide to Texas Republican Rep. Tom DeLay, then the House

majority leader. He tried to carry Chevron’s case forward into the US Congress, pressuring

Congress to take actions38 for blocking CNOOC’s offer. CNOOC, in the other hand, hired

law firm Akin Gump Strauss Hauer & Feld to lobby for their intention. Among those

lawyers, Partners Alan D. Feld and James C. Langdon Jr. were major fund-raisers for Bush

administration, and the consultant, Bill Paxon, was once Republican representative from

New York, thus owned connections in the Congress. In addition, CNOOC attempted to

reverse the negative image to China in Washington by incorporating media strategy.

CNOOC hired Public Strategies corp. to do the job, The vice chairman then, Mark

McKinnon, was the director of President Bush’s media campaign in the 2000 and 2004

elections39.

Both Chevron and CNOOC in 2005 threw in huge amount of money hiring lobby

firms and media companies. According to the statistics from opersecret.org40, Chevron in

2005 spent around 9 million 490 thousands dollars in lobby firms (only less than 2 million

in 2000). CNOOC spent 2 million 220 thousand dollars for their first time in 2005 in

lobbying and public relations (see figure 2). Having been building public relations with the

government for a long time, Chevron, compared with CNOOC’s inexperience, excelled

CNOOC in influencing government’s behaviors. Besides, the coming China’s threat

38 Russell Gold and Greg Hitt. “Chevron Labors to Derail,” The Wall Street Journal, June 30, 2005. 39 Steve Lohr. “The Big Tug of War Over Unocal,” New York Times, July 6, 2005. 40 Opensecrets.org is founded by the Center for Responsive Politics, which is a non-partisan, non-profit

research group based in Washington, D.C. that tracks money in politics, and its effect on elections and public

policy. We can track how much money each corp. spend in lobby firms.

http://www.opensecrets.org/lobbyists/index.asp

depicted by Chevron41 corresponded better to the attitude from Washington, which I will

discuss later.

Figure 2. Annual lobbying spending comparison between Chevron and CNOOC. (Sources:

Lobbying Database, The Center for Responsive Politics, see footnote 38.)

Blue Team

Blue Team is a loose alliances of members of Congress, congressional staff, think

tank fellows, Republican political operatives, conservative journalists, lobbyists for Taiwan,

former intelligence officers and a handful of academics, all united in the view that a rising

China poses great risks to America's vital interests(!. They have successfully applied their

influence in the Congress to attach riders to legislation in Congress to affect U.S. foreign

policy toward China.

41 Jonathan Weisman. “In Washington, Chevron Works to Scuttle Chinese Bid,” Washington Post, July 16,

2005, Page D01. 42 Robert G. Kaiser and Steven Mufson. “Blue Team Draw a Hard Line on Beijing,” Washington Post, Feb.

22, 2000, Page A01.

The US-China Security Review Commission in the Congress was an ideal place for

them to disseminate their critical perspectives toward China’s growing power. Though the

commission was bipartisan, which consisted of six republicans and six democrats, the

experts and consultants they hired were deeply affected by the ideology from the blue

team(". Their 2002 annual report of US-China Security Review Commission, commissioned

by the Congress, believed that the United States is “a superpower in decline.” The Chinese

communists believe that America is their “long term competitor for regional and global

military and economic influence.”(( In report of 2006, they signaled the alarm for China’s

overseas investment in energy sector, considering that, due to the disbelieving in free world

energy market, Chinese government treated state ownership of energy assets as more secure

than reliance on the world market for trade oil. And such idea was in conflict with U.S.

national interest, which considers the preservation of energy security relies on liberal

energy market. They concluded that CNOOC’s intention to merge Unocal was to control

overseas energy source, rather than selling energy into the world market45, therefore seeing

this merger case, if succeed, will threaten U.S. energy security.

In addition, many figures from the blue team during the period of intensive debates

in the mid 2005, came out to criticize China’s expansive behavior, urging that government

should intervene to block CNOOC’s offer. The current Speaker of the U.S. House of

Representatives Nancy Pelosi, then House Democratic Leader, in 2005 called CNOOC bid

to acquire Unocal “a graphic example of America's energy vulnerability.46” Another

43 Greg Rushford. “In Search of an Enemy,” The Rushford Report, August, 2002. http://www.rushfordreport.com/2002/8_2002_Yankee_trader.htm 44 “Report to Congress of the U.S. – China Security Review Commission,” 2002 Annual Report, Chp.1. 45 “Report to Congress of the U.S. – China Security Review Commission,” 2006 Annual Report, pp.96. 46 “U.S. Opens China Energy Office as Chinese State Oil Bids for Unocal,” Environment News Service,

Washington, DC, July 1, 2005. http://www.ens-newswire.com/ens/jul2005/2005-07-01-03.asp

important figure in the blue team Frank J. Gaffney Jr., the president of the Center for

Security Policy in Washington, published several comments in mid 2005 to blame this deal,

arguing that “it will almost certainly require government action to prevent Beijing from

once again having its way with sensitive American assets and national-security equities.47”

Overall, blue team expected the Bush administration to constrain China’s oil diplomacy to

secure American national security. Their perspectives of policy demand accorded with

Chevron’s, together, as a consequence, they successfully guided the policy from

Washington to their favor.

Policy Supply Side

After understanding the demand side in this case, I then discuss the supply side of

policy, which I consider the US Congress and White House to be the most critical actors.

While Congress overwhelmingly passed several bills to obstruct CNOOC’s offer, White

House decided to remain silent. We can apply Mancur Olson’s theory of collective action

to understand their divergent attitudes.

Congress with High Profile

In Congress, CNOOC’s offer brought about great concerns. They, on the one hand,

disseminated the implication of this case to the society, attempting to generate public

awareness and observe the public opinion. On the other hand, they sent letters to the

47 Frank J. Gaffney Jr. “China’s Charge,” National Review Online, June 28, 2005.

http://www.nationalreview.com/gaffney/gaffney200506280909.asp

Secretary of Treasury (as chair of Committee on Foreign Investment in the United States -

CFIUS) to pressure the White House and also intended to block the deal through legislative

bills48. Congress, as early as in 1988, has already initiated the Exon-Florio provision of the

Defense Production Act (Exon-Florio provision). This provision aimed at setting a barrier

to buffer the growing trend of foreign companies’ acquisition of U.S. companies,

delegating the President of the United States the power to rule against the foreign mergers

that would potentially harm national interest49. The agency delegated to conduct

investigations is CFIUS, which is housed in the Department of the Treasury. The content of

the provision emphasizes on securing national interest, allowing CFIUS to conduct

investigation once it notice merger cases that will potentially threaten U.S. security and the

President should decide whether or not to deny the deal according to CFIUS’s investigation.

Due to CFIUS’s small size and not being transparent, however, CFIUS has only

investigated 25 cases from 1988 to 2005. Among those case, only 12 cases were send to the

President for decision. Some argued that without intervention from Congress, the chance

that CNOOC’s offer be inquired by CFIUS was very slim for CNOOC’s intention wouldn’t

be considered as a threat to U.S. national interest50.

Without any effective policy to obstruct CNOOC’s offer, Congress, in 2005, started

to pass legislative bills to intervene. Several bills in the 109th Congress addressed their

concerns. H.Res. 344. (Pombo) expressed the concern that “a Chinese state-owned energy

company exercising control of critical United States energy infrastructure and energy

production capacity could take action that would threaten to impair the national security of

48 Dick K. Nanto et al. “China and the CNOOC Bid for Unocal: Issues for Congress,” CRS Report for

Congress, September 15, 2005, p.14. 49 Ibid., p.11. 50 James A. Dorn. “U.S. – China Relations in the Wake of CNOOC,” Policy Analysis, CATO Institute,

November 2, 2005, p. 5.

the United States.” S. 1412. (Dorgan) prohibit the merger, acquisition, or takeover of

Unocal Corporation by CNOOC. In addition, the Energy Policy Act of 2005 was signed

into law on Aug. 5, 2005. Section 1837 “requires a study by the Secretaries of Defense and

Homeland Security of the growing energy requirements of the PRC … the studies would

include an assessment of the relationship between the Chinese government and energy-

related business located in China and delays CFIUS from sensitive international energy

mergers and making recommendations to the president.51” U.S. Representative Richard

Pombo, a Republican from the California district, where Chevron is located, claimed “If we

hadn't put the amendment in the energy bill, they [CNOOC] might have succeeded.”

According to this act, CNOOC’s deal would be delayed at least 120 days52. Due to

the unforeseeable cost caused by this suspension, CNOOC decided to withdraw,

condemning the Congress to apply political means to obstruct CNOOC’s offer, which was

driven purely by the economic consideration53.

White House with Low Profile

Although lobbyists hired by Chevron and CNOOC all maintained good relations

with the Bush administration and all hoped to influence the White House to act in their

favor, Washington chose to remain silence rather than hard-line actions in Congress. Some

argued that the silence of White House was a result of pressures coming from several

distinct directions, and the Bush administration didn’t want to displease each of them.

51 CRS Report for Congress, p.15. 52 “Cnooc Drops $18.5 Bln Unocal Bid Amid U.S. Opposition,” Bloomberg, Aug. 2, 2005.

http://www.bloomberg.com/apps/news?pid=10000006&sid=ah3uSZmkLLBI&refer=home 53 Matt Pottinger et al. “Oil Politics: Cnooc Drops Offer for Unocal, Exposing U.S.-Chinese Tensions,” The

Wall Street Journal, August 03, 2005.

Therefore, the White House wanted to first wait for the CFIUS’s investigation outcome,

then to make comments54. Besides, if this deal was badly handled, they feared to further

sour the already precarious relation with Beijing. Bush needed cooperation from China, at

that time, to cope with troubles of North Korea and terrorism. However, the U.S. – China

relation is always trapped in intellectual property rights, the trade deficit, the currency

issue, human rights and Taiwan issues. If Bush came out to join Congress’s bashing China,

it would definitely harm bilateral relation55.

Congress is a legislative organism for representatives of people to express opinions

from divergent angles and hopefully to form the consensus among different sides.

Comparing with administrative organism like the White House, there is much more room

for Congress to harshly opine on current affairs. In contrast, White House is an

administrative unit to execute regulations and enforce laws. It stands at the forefront,

representing a whole country to deal with domestic and foreign affairs. Whenever it makes

decision, a lots of parties will be affected and it will influences a country’s perception

instantaneously. Regarding to foreign policy, actions from White House will directly affect

foreign attitude toward America. In this sense, White House has been suffering more

intangible constrains than the Congress. From the perspective of interest groups, the

President possess enormous power, therefore all divergent parties will seek to influence his

decisions. They will exert influence as much as they can into the White House. It seems

that the president needs to endure more pressures and constrains than the Congress.

If one believed the assumption above, we can further argue that the White House is

less willing to express opinion in this case. In Mancur Olson’s view of collective action, it

54 Interview with Elizabeth C. Economy. “Q&A: China's Bid for Unocal,” New York Times, July 6, 2005. 55 Ibid.

might be reasonable to see the Bush administration as lacking the strength (the poorer one

in Olson’s sense) to opine on the CNOOC’s offer. Therefore, it would rather become a free

rider on Congress’s actions and remained silence. The ability of Congress to express

opinions, in contrast, was stronger (the richer one) and suffered less than the White House

from intangible pressures and constrains as mentioned above. In the CNOOC’s case, we

can see the problem of collective action, which free-riding on Congress’s tough stance

maximized the benefit of the White House. There is no identical stance toward this deal

between the legislative and administrative units. However, going along this way actually

help absorb the criticism from Beijing when Congress acted toughly toward China.

Furthermore, White House would have to risk any political impact coming from China.

Realism Overwhelms Liberalism

After realizing the demand and supply sides of policies in this case, I adopt realism

and liberalism coming from international relation theory to analyze divergent views toward

the implication behind CNOOC’s offer, and furthermore to illustrate the reason why the

Congress in the end drew up several bills that impeded CNOOC’s more lucrative deal.

Realist Perspective

According to Aaron Friedberg’s analysis, ideas of U.S. China policy are divergent.

Among different perspectives, there are two most important ideas that dominate, which are

Realist Pessimists and Liberal Optimists 56. Both views fit into the concepts of realism and

liberalism respectively. In this case, we can sense that the debate on CNOOC’s intention

was actually driven by these two different ways of how to observe and predict this case.

In this case, there are five main concepts from realism that are critical to support the

argument of obstructing CNOOC’s deal from succeeding. First of all, the realist considers

that in the anarchic international system, recurrent struggles for power and survival are

inescapable. History is a vicious circle in the sense that without constraints from

supranational authority, each state will contend for seeking hegemonic status. Secondly,

when the power of a nation is rising, it will tend to be expansive in order to secure markets,

resources and transportation routes, and to protect its domestic security and development.

Thirdly, rising powers will seek to assert themselves and are often drawn to challenge

territorial boundaries and international institutional arrangements. Fourthly, when there is

conflict between dominant and rising powers, the former will tend to devastate the latter by

force in order to protect national interests57. Finally, realism emphasizes the importance of

relative gain, considering other nation’s gain as domestic loss. Cooperation becomes harder

and conflicts happen more easily due to each nation indispose other nations to gain.

When CNOOC, which secured low interest loan from parent company dominated

by Chinese government for controlling more than 70% shares,58 announced to contend for

the bid, realists in the Congress, think tanks and media gained momentum to blast China’s

overseas expansion. Chevron also free-ride this trend to join this group. They argued that

United State and China have been colluding in several issues, such as China’s expanding

56 Aaron L. Friedberg. “The Future of U.S. – China Relations: Is Conflict Inevitable?” International Security,

Vol. 30, No. 2 (Fall, 2005), pp. 7-45. 57 Ibid, pp. 16-21. 58 CNOOC, China's No. 3 oil company, is 70 percent owned by the state-controlled China National Offshore

Oil.

military strength, challenging position on Taiwan and South China Sea, selling weapons to

U.S. adversaries, and investing in regimes like Sudan and Iran that respectively violates the

human right and seeks nuclear weapons. Therefore, the coming conflict with China is

foreseeable59. Based on this assumption, they considered that once a serious conflict break

out in the future, Unocal, if acquired by CNOOC, would be a part of Chinese power. As the

biggest shareholders, Beijing would treat CNOOC as the extension of its power, denying

Unocal’s production into the world energy market once conflict broke out. Consequently,

United States would be less secure for less energy in the market. In addition, in terms of

relative gain, plus that the prediction of rising power’s behavior mentioned above

corresponded to China’s overseas expansion, realist feared that every piece of energy China

acquired will automatically harm U.S. energy security and China will continue to expand

overseas that Washington should act to block. Michael Klare thought that, foreseeing the

world with energy shortage, each nation will engage in serious battles for securing finite

resources60. Realism sees China as a rising power and will advance to energy sources

abroad to facilitate oil import to feed domestic surging demand. In this sense, U.S. would

have to contend with China in the oil market.

Liberal Perspective

In contrast to realism, liberalism urged government not to intervene in this case, let

the free market mechanism decided. Their arguments are based on the following concepts.

59 Richard Bernstein and Ross Munro. “The Coming Conflict with China,” New York: Random House Inc.,

1997. 60 Michael T. Klare. “The New Geography of Conflict,” Foreign Affairs, Vol. 80, Issue 3 (May/June, 2001),

p49-61.

First of all, more trade and investment will deepen interdependence between two states.

The more both states depend on each other, the less likely they will go to war conflict,

therefore facilitating peaceful relation. Secondly, because a state needs courts, contracts and

reliable rule of law to accommodate itself to international trade, democracy will be

promoted as states deepen their degree of bilateral trades. Thirdly, enhancing bilateral

communication will reduce uncertainty about intentions and increase the capacity of

governments to make credible, binding commitments to each other. Finally, liberalism

emphasizes on absolute gain in the sense that other’s gain is not our loss. In their

perspective, history is a smoothly ascending curve, not a vicious circle resulting from

recurrent power politics61.

In short, liberalism expects to promote economic development through bilateral

trades and investments that will help avoid conflicts. To them, if U.S. is to prevent conflict

with China, it should increase economic exchanges with China to accelerate its economic

development. Based on the logic of liberalism, they argued that an economically rising

China is positive to peace, rather than a threat62. They saw CNOOC’s offer as a pure

economic deal without political consideration in it. Therefore, U.S. government shouldn’t

intervene. In addition, they argued that “China currently stands outside key international

agreements that monitor and regulate official finance.” U.S. should encourage full Chinese

participation in existing agreements and to strengthen these agreements that incompletely

cover energy deals63. They urged Washington to stop treating China’s surging oil demand

61 Aaron L. Friedberg. “The Future of U.S. – China Relations: Is Conflict Inevitable?” International Security,

Vol. 30, No. 2 (Fall, 2005), pp. 7-45. Robert Powell. “Absolute and Relative Gains in International Relations Theory,” The American Political Science Review, Vol. 85, No. 4. (Dec., 1991), pp. 1303-1320. 62 James A. Dorn. “U.S. – China Relations in the Wake of CNOOC,” Policy Analysis, CATO Institute,

November 2, 2005, p. 8. 63 Peter Evans and Erica Downs. “Untangling China’s Quest for Oil through State-backed Financial Deals,”

Policy Brief # 154, The Brookings Institution, May, 2006, p. 2.

as a threat and cooperated with China in order to lead it to blend into international

economic regimes64. Allowing CNOOC to merge UNOCAL, to liberalism, was a good

opportunity to force China to follow and respect international agreements.

As for technological innovation, Edward Morse argued that while states with

abundant resources struggled to explore, the overall energy supply around the world would

increase through technology and investment from abroad, therefore mitigating the impact of

climbing global energy demand. Political economy of oil nowadays is no longer zero-sum

game65. Totaling all the gains of each state, the overall world oil supply will be climbing.

Hence, Unocal should accept CNOOC’s better economic offer. Besides, China’s

investment overseas should be encouraged because China’s abundant funds will benefit

developing countries to explore more energy reserves, overall increasing global oil supply

and thus securing global energy security. David Victor used real statistics to argue that U.S.

government shouldn’t meddle in this case because there was only 10% of overseas oil

going back to China. The rest of them actually went to international market$$. To sum up,

liberalism considered this deal and China’s overseas expansion as not going to harm U.S.

energy security. Instead, it will benefit to the global market, promote openness and

democracy in China and force China to abide by international regulations and agreements.

Why Realism Win

64 David Zweig and Bi Jianhai. “China’s Global Hunt for Energy,” Foreign Affairs, Vol. 84, Issue 5

(September/October, 2005), pp. 25-38. 65 Edward Morse. “A New Political Economy of Oil?” Journal of International Affairs, Vol. 53, No. 1 (Fall,

1999), pp. 18-20. 66 David G. Victor, “What Resource Wars?” National Interest, Nov/Dec 2007, p.48.

CNOOC’s case induced many debates from Realism and liberalism perspectives in

the media and academy. One expected government’s intervention, and some others hoped

government staying out of the case. As we saw the outcome, the concept of realism won

over liberalism, exerting greater influence in the Congress to its favor. Under the lead of

Richard Pombo, Representative from Californian with closed relation with Chevron, the

Congress initiated several bills right before they struck the deal. Among them, Energy

Policy Act of 2005 was the last straw to crush CNOOC’s intention. Nancy Pelosi was

another important figure in Congress, who was hostile to China for human right issue, to

support tough stance toward China. She called that “the Chinese government's control of

CNOOC made the bid possible, not the free market67”, thus violating the value of free

market mechanism. China’s generous financial support complicated the case. The fear of

China’s overseas expansion has also been reflected in every annual report of US-China

Security Review Commission since 2000.

Another reason CNOOC failed was due to the silence of White House. In contrast

with seeing China as “Strategic Partner” from the Clinton administration, the President

Bush saw China as “strategic competitor”. This concept accorded with ideas of blue team.

Both group feared China’s rising power in the world and condemned the tyranny of

communist rule. As a consequence, blue team’s realism was more easily to be accepted by

the Bush administration68. In addition, neo-conservatism that surrounded Bush

administration also considered that China’s expansive energy policy would harm U.S.

67 “U.S. Opens China Energy Office as Chinese State Oil Bids for Unocal,” Environment News Service,

Washington, DC, July 1, 2005. http://www.ens-newswire.com/ens/jul2005/2005-07-01-03.asp 68 John Feffer. “China: What's the Big Mystery?” Foreign Policy in Focus, December 4, 2006.

http://www.fpif.org/fpiftxt/3752

interest. Not only aiming at dominating East Asia, they predicted China also tried to

dominate the world69.

While the Congress and White House were both enveloped by realist ideas from

Chevron’s lobbyists, the blue team and neo-conservatism, it’s almost impossible for

CNOOC to reverse the situation with limited resource and experience in the United States.

Under Congress’s hard-line stance, the White House, though fearing the threat from rising

China also, chose to remain silence and free-ride on Congress’s action. The Bush

administration was not willing to put U.S. – China relation in jeopardy. Claims that

CNOOC’s offer was a pure economic deal, and CNOOC’s deal would benefit global energy

market, obviously were overwhelmed in the end by the realist ideas that worried China’s

coming threat and the vague relation between CNOOC and Chinese government.

Conclusion

In this case, even though the liberalism launched several optimistic perspectives

such as the deal will enhance bilateral relation and economic development and promote

democracy in China, political consideration in Washington eventually won over the free

market mechanism. Liberal ideas this time couldn’t effectively influence policy outcome

though there were many appeals in media and academy to urge non-intervention. However,

the strength was not big enough to emulate realism’s influence. The realist’s demand for

policy successfully received response from Washington.

69 Thomas Donnelly and Melissa Wisner. “Chinese Power Play,” Weekly Standard, July 29, 2005.

http://www.aei.org/publications/filter.all,pubID.22923/pub_detail.asp

These two ideas read the rising Chinese power differently. However, they basically

see a state’s behavior as simply the product of objective and material factors. States’

behaviors are driven by international regimes and institutions70. In this sense, they both

omitted that it is possible for states, in the process of development, to be influenced by

subjective factors. Another international relation theory, constructivism, helps fill this void.

Constructivism considered that a state’s behavior is socially constructed by identities,

strategic cultures and norms. For example, as China’s joining international society, the

strategic thinking constructed in the cold war era will be likely to alter, advancing toward

more moderate stance and embracing the soft power71. Constructivism observed that the

world trend is not static but changing. While the world proceeds, a state’s realization to

political and economic affairs might alter. In constructivist’s view, a state’s behavior, rather

than hinging on material interest, can be dominated by inherent ideas and perspectives.

Applying the constructivist concept to CNOOC’s case, U.S. government should utilize this

opportunity; designing incentive to lead China to give up belligerent behaviors they worried

and also tried to affect China’s perspective and realization to world affairs. Liberalism,

while being optimistic, has to recognize that China’s communist government was still

affected by strategic thinking of power struggles deriving from the cold war era. China’s

climbing military investment can be the proof. Liberalism shouldn’t act over optimistically,

predicting China will in the end advance to the rosy picture it envisages and should

incorporate ideas that China might follow the old-time idea of acting like a rising power

who tries to dominate the world.

70 Aaron L. Friedberg. “The Future of U.S. – China Relations: Is Conflict Inevitable?” International Security,

Vol. 30, No. 2 (Fall, 2005), pp. 34. 71 See Joshua Kurlantzick's book Charm Offensive discussing the rise in China's utilization of its growing soft

power. Joshua Kurlantzick. “Charm Offensive: How China's Soft Power Is Transforming the World,” New

Haven and London: Yale University Press, 2007.

U.S. government chose to accept the idea of China’s rising threat in this case.

However, if China keeps aware of pressures from Washington, this might force China to

hedge against dependence on oil supplies vulnerable to American power, thus igniting

conflict between U.S. and China. Washington should take liberalism’s prediction into

consideration and devised an effective strategy to force China alter strategic thinking. If

U.S. government successfully lead China to the liberalism’s optimistic scenario, then

CNOOC’s acquiring Unocal will contribute to the global energy market and act as a force

to democratize China, therefore lowering the possibility of energy wars in the future.

Furthermore, China can exert its influence in developing countries, help energy exploration

and excavation, and force those countries to use energy wealth in developing economy

rather than being damaged by domestic unrests. As a whole, this will really enhance the

global energy market.