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Why is America Worried?
Fu Chengyu  Updated: 2005-07-06 11:24

Two weeks ago, our company, Cnooc Ltd., extended a friendly, all-cash offer to Unocal's board of directors. After being invited to engage in dialogue with Unocal earlier this year, we entered detailed negotiations regarding a possible merger. We have made our offer because Unocal's asset base -- 70% of its oil and gas reserves are close to Asian markets where we operate -- fits our business extremely well. We are listed on the New York and Hong Kong Stock Exchanges and have fiduciary obligations to all of our shareholders. We believe this merger will offer our shareholders, which include many leading U.S. institutional investors, tremendous growth opportunities.

The majority of Unocal's Asian reserves are gas. Its proven reserves are mostly committed to long-term contracts in the region, notably for domestic gas markets in Thailand and Bangladesh. Unocal also has very substantial gas resources -- or unbooked reserves -- particularly offshore East Kalimantan, Indonesia, which will be developed for the production of Liquefied Natural Gas (LNG). Although Cnooc will have no direct influence over the marketing of the LNG, since this is conducted by Indonesian state-owned entities, it is expected that the clean-burning LNG will be sold primarily into Asian markets.

We also believe that our two companies can bring even more oil and gas to the U.S. market by building on Unocal's strength in the Gulf of Mexico and other producing areas in the U.S. Last year, Cnooc grew production of oil and gas by over 7%. Over the past three years, we achieved an average reserve replacement ratio of about 213%, one of the best records in the industry.

We have partnered with many leading oil and gas companies in a significant number of projects in China and elsewhere in the world. An example is the memorandum of understanding we have signed with Chevron to participate in the Gorgon LNG project in Australia which is expected to supply LNG both to China and the U.S. Of course, sometimes we compete with these companies as well -- in this case with Chevron for Unocal. That is because we are both trying to pay the best price, for a good business. I adhere to the belief that the highest price wins. Given that our bid is about 11% -- or $2 billion -- higher than Chevron's stock-and-cash deal as of today, this competition also benefits Unocal's shareholders, in addition to our own. The bottom line is that our all-cash offer puts more dollars in the pockets of shareholders and is not subject to the daily fluctuations and uncertainty of the stock market.

There has been huge change in China in recent years, as more and more businesses have learned to focus on proper financial management and corporate governance disciplines. Cnooc is recognized for being well ahead of most of them, however. We are a listed company, with half of our eight-member board composed of non-executive independent directors. Our parent company has been a leader in the development of the oil and gas industry in China since its formation in 1982. It is investment-grade credit-rated, has net cash on its balance sheet and is highly profitable.

Furthermore, ours is a business run by professional business people. Most of the team here, including me, have been in the oil and gas industry throughout our careers. We are also very international in our approach. We have been working in joint ventures with other leading oil companies for 20 years. After my masters degree at the University of Southern California, I spent 13 years working with international oil companies, many of them U.S. oil companies. When I led Phillips' joint venture with Cnooc in China, we had 200 expatriate employees working alongside 200 Chinese. That was a very positive experience, and I want to share with you my great personal pride at the thought of leading a similar effort to combine the talents of an American and Chinese company. I am therefore very pleased that Cnooc and Unocal have begun discussing the merits of our offer and I hope we can reach an agreement on a consensual transaction in the near future.

We have recently filed with the Committee on Foreign Investment in the United States (CFIUS) and look forward to entering discussions with them and answering all their questions as soon as possible. We are prepared to agree necessary modifications to our proposal in order to alleviate any concerns they may have.

When my company's board authorized the offer for Unocal, I knew that the transaction would create great interest -- and even concern. That is why we set out straight away, to address those concerns with up-front commitments surrounding our deal.

The most fundamental point of concern that we face is that American oil and gas should stay in America -- and I promise that we will continue Unocal's sales practice of selling all, or substantially all, U.S. oil and gas in U.S. markets. The American public's anxiety -- that we plan to take fuel back to China -- is based on a misunderstanding. It would not be economically rational to take U.S. oil and gas to China -- not least, as the U.S. is one of the strongest markets in the world. In fact we will increase production in the U.S., particularly from the Gulf of Mexico. That will mean more oil for U.S. consumers, not less. It is worth noting that international oil and gas =perators active in China are free to export their share of production anywhere in the world, or sell into the domestic market.

We also wanted to send a very clear message about jobs, so our second commitment is that Cnooc will seek to retain substantially all Unocal employees, especially those in the U.S. We think Unocal has attractive and efficient operations and a high quality team. Our merger, unlike Chevron's, is not based on rationalization and cost cutting. As a result it will save a great many American jobs.

Finally, we will sell or place into special management arrangements any pipeline, gas storage, terminals and other midstream assets that might raise concerns in the CFIUS process. Unocal has a relatively small portfolio of midstream assets, which include its 22% interest in the Colonial Pipeline and its less than 2% interest in the Trans Alaska Pipeline. While other foreign entities own significantly larger stakes in even more critical U.S. energy infrastructure such as refineries, we believe, as long as a divestiture or CFIUS-approved management structure for the assets at issue doesn't damage Unocal's business, that these assets are not core to the shareholder value we can create with this merger.

At the heart of our commitment is the CFIUS process. We recently filed a notice so that CFIUS could begin to review our proposal. In preparing our bid, Cnooc always planned to voluntarily seek CFIUS review. I respect the concerns the process seeks to address and believe that a successful review can help build even stronger trading ties that are so vital to our two countries.

I know that operating a business in the U.S. is a complex undertaking. Only the companies with the best management teams are able to survive and prosper. Thus, Cnooc will make every effort to persuade the members of Unocal's executive and operations management team to join the combined company. Unocal has more than 100 years of experience in the U.S., and the combined company will benefit from that knowledge. We know their people well and respect them as some of the best in the industry. We, too, have a 20-year track record of working with other international businesses, integrating teams from different countries into effective cross-border joint ventures. With the Unocal team alongside, us I am confident we will build a compelling business.

I know that debate about our offer will continue. I am conscious that in some ways that Cnooc is helping show the American people the face not just of our business, but of the changing nature of corporate China. The best way we can do that is by being open and responsive to people's concerns, and by ensuring that they see the careful, transparent standards of shareholder discipline that we apply to a situation like this.

Our company has grown shareholder value from a market cap of $6 billion when it listed four years ago, to $25 billion today. I will continue to focus on bringing value to Cnooc shareholders and am convinced that the acquisition of Unocal can help us. I will also be focused on providing our better offer for Unocal shareholders, bringing oil and jobs to the United States, and on our assurances that we will be an open and responsible participant in the process. 

From the Asian Wall Street Journal,Mr. Fu is chairman and CEO of Cnooc Ltd.

The above content represents the view of the author only.

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