Relax and enjoy a game of 3-D chess for oil: Unocal vs. Chevron vs. Cnooc

Quillnews urges all concerned about China’s potential take over of Unocal to take a deep breath. (IHT) We can expect some fear-monger chicken littles in DC to get whipped up and read worrying statements into the Congressional record about falling skies. (WSJ) Ignore that stuff.  Nobody’s security is at risk if China buys Unocal's assets.  Hardly.  Remember, as far as oil is concerned, there is one market – the world. A barrel for one, is a barrel for all. Every barrel developed, bought and sold by someone someplace else means they aren’t coming after your’s. (WSJ, WSJ2, WSJ3, WSJ4, WSJ5, MSN, WS)

Besides the game is still afoot. Chevron knows how to play oil chess in 3-D, and also can dance like Ginger Rodgers, backwards and in high-heels. Unocal shareholders benefit from a bidding round between Cnooc and Chevron.  The Treasury Department’s review process by the Committee on Foreign Investment in the U.S will ensure the public’s overall interest is protected. (WSJ) Lots of smart lawyers, lobbyists and DC hard ballers have signed up for each team.  They'll work it out. (Editor's aside: As a former oil company soldier, I miss the action in these fights; I admit it. See Just Business Just War for details.) But nix with the China bashing.  They are playing the oil game the way we want them too. After insisting China behave according to market rules, to switch signals and say they can’t buy oil assets on the world’s market is wrong.  It is hypocritical, and ignores US behavior in world markets.  Our guys buy up petroleum assets all over the place, and we correctly criticize states (Venezuela, V2, Mexico) which prevent market forces from allowing oil and gas to be developed efficiently. (HT Publius Pundit)

At the end of the day, as far as oil consumers are concerned, as long as oil’s owners sell supplies openly at market prices, the question is not who owns oil; it is how much total oil is available around in the world market and what price is being charged to buy it -- wherever.  Whether China or Unocal shareholders hold title to the assets Unocal currently has on the books means zip – nada.  What matters is that the oil owned by whichever owner is developed according to world market rules and civil order and that it gets consumed efficiently, not wasted.

The problem with oil always comes when producers withhold supplies from the market, or try to hike prices beyond what the market is willing to pay, or if there is an unexpected interruption of supply because of some natural disaster, accident or war. OPEC and Arab oil producers got into such trouble in 1973-74 because of their unilateral price hikes, the withholding of oil from some customers, and the attempt to use access to oil as a political weapon to change US policy on Israel!  Now that was important. It only lasted a few months, but – like the war in Vietnam – nobody has gotten over it.  Despite conventional lefty political wisdom, the Arab Oil Embargo changed industrial behavior thereafter, ensuring efficiency, on a diversity of supply, and development of alternate forms of energy. The next biggest change in the oil markets came Sept 11.  After the jihadists’ attack, the world's grown-ups realized they had to hunt down and kill the Islamic extremists and their state enablers, many of whom were essential oil producers. The world made the judgement it could tolerate (for now) waiting for a cooperative (if politically backward oil-producing) Islamic state like Saudi Arabia to reform, but it could not tolerate having a Saddam, a murdering psychopath, loose on top of Iraq’s essential petroleum resources to threaten his people and neighbors with weapons of mass destruction.  The brave of the world signed up with the US in this war. (See Chrenkoff's post: the willing).  (Editor's aside: To France, Germany and the other freeloading defense and oil-price parasites willing to let others do the work that protects you; all is not forgiven.)

Whether the WMD existed or not was irrelevant (despite the whining and gnashing of the anti-Bush 43 crowd).  Everybody – for a dozen years – thought Saddam had WMD or would get them soon and that he would use them. Saddam would not cooperate to demonstrate or prove to the UN and the world he didn’t have them and was leveraging this imprecision to hold power, terrorize his people, sew violence and corrupt the region, bribe and poison the UN, shooting at the US no-fly pilots, and otherwise bullying the world with his behavior over essential oil supplies.   Oil prices today are hovering at $60 a barrel, and climbing.  The reason is demand from China and India.  Imagine how much worse this situation would be with Saddam still in power. (Kagan, QN, QN2)  Because of US action, at least the Saddam factor in the oil price equation is solved…  (Editor's aside: this is a long-standing Quillnews theme QN, QN2, QN3, QN4, QN5, QN6, QN7, QN8, QN9, QN10)

The symbolism of China buying Unocal is more important than the reality.  This event demonstrates that we really are in a new world! Unocal is a California icon. (U, U2, U3, U4) (Editor's aside: in oil, every company has its character. When you think Unocal, think linebacker.)  Bush 41’s new world order is coming true.  Slowly but shockingly.  Good thing too. The alternative orders are offered 1) by the gunboat pirates in Chicom’s blue water navy, or 2) by the jihadists who want to rule the world like a 14th century caliphate. 

Industry has been going through a downsizing since the US government adopted a free market approach to oil production and distribution with deregulation and oil price decontrol in 1981.  Employment levels in the US oil industry, which were 860,000 in 1982, fell sharply by a half-million to 360,000 jobs by 2000.  (Editor’s aside: one of those lost jobs was mine!)  The oil price collapse in 1986, a sluggish economy, the collapse of the Soviet Union in ’89 and the opening up of former Soviet republics to western oil and gas development… well, the entire industry has been remade.  Free standing independent companies with iconic brand names like Citgo, Gulf, Texaco, Mobil, Amoco, Sohio, Union ’76, Phillips ’66 are no more. 

In the US the super-majors ExxonMobil, Chevron remain, with ConocoPhillips and a few others smaller players trailing, seeking market niches here and there. (Editor's aside: Some, i.e. Amerada Hess, Anadarko, are excellent outfits.) Overseas, the non-state western competition are BP and Shell from the UK/EU; BHP Billiton from Australia; Total from France; ENI from Italy. (WSJ) Then it gets a bit dicey. The global oil industry is dominated by state oil companies from Kuwait, Saudi Arabia, Iran, Iraq, UAE, Qatar, Nigeria.  In this hemisphere, efforts to privatize and integrate oil resources into the global markets in Bolivia, Venezuela and Mexico have run into anti-gringo nationalists politics. Russia's Putin hasn't decided if market forces can flourish.  So far, his record is mixed. These countries and their economies will be stunted as a result. The best of the state companies can have well run operations (Aramco, QGPC); the worst, a scandal of inefficiency and corruption. Any reader of the daily newspapers can figure out which is which. 

The collapse of the Soviet Union, the bankruptcy of centralized state planned economic development and embrace by India and China – 40% of humanity – of market economics, WTO principles and trading rules has unleashed a torrent of economic growth and prosperity.  It also means they need oil and their demand is pushing prices up. China is also coming out of its self-imposed isolation and embracing world market principles; it is showing signs of behaving like a regular mature nation.  It is trying to secure energy supplies and otherwise do what it can to assure its people they will have the oil they need.  Just like everybody else. Good. Nothing wrong with any of that.  They are cutting deals in Venezuela, Canada, Russia, Kazakhstan, Iran, Vietnam, Indonesia.  Now they want to purchase Unocal’s global assets – including acreage in the Gulf of Mexico, the Caspian region, and even in Vietnam’s waters in the South China Sea. China has been learning the ropes in the world oil markets for a few years. In the early 90’s it looked like China was going to use the blue water navy it was building to take oil it wanted at gunpoint!  (Editor's aside: I wrote a book Blue Dragon about this).  Today they are willing to pay good money for the oil rather than steal it.  (That’s the good news WP; though there’s lots to worry about with China. WT, WT2, WT3)

At home China has state-owned upstream and downstream companies (PetroChina and Sinopec) and created Cnooc for off-shore business development. This is regular industry behavior, and straight from the what-do-we-do-now playbook that China’s international consultants, competitors and potential partners have advised that country's Reds-who've-lost-the-faith for years.  Nix the gunboats.  Buy assets instead.  China’s oil industry has even tried to attract outside investors into minority share ownership positions. So far the results have been disappointing – after all, Chicoms still run the country. (QN, LAT) Accounting it secretive so costs are not transparent, there is no rule of law to protect contracts, the prices are too high and the shares offered too paltry, real ownership denied. Stay tuned. (QN)       

Quillnews observation:  When I first heard about the Cnooc bid for Unocal, my thought what that Cnooc was deliberately making trouble for Chevron by acting to increase the amount that Chevron will pay for Unocal’s assets.  Cnooc indeed may want Unocal’s assets for themselves. (Some key Unocal assets: Azerbaijan, Thailand, Indonesia, Bangladesh, Vietnam, North America). But their uninvited bid for Unocal, after Unocal had agreed to be purchased by Chevron, also is a signal to the market that China has come to play.  An uninvited bid, particularly one that has a slim chance of success, is essentially the act of a company that wants to be a listened to as a player in world oil markets. It has the effect of showing a company's seriousness of purpose and market clout with government ministries around the world, and with others in the oil markets with whom China will not only compete but which will also partner in certain places. For example, China has acreage in the Caspian region.  So does Chevron.  So does Unocal.  One way for Cnooc to leverage its position in the Caspian is to show Chevron’s executives that they can make them pay higher prices elsewhere. Such behavior earns Cnooc respect and will cause all in the markets to pay closer attention to Cnooc initiatives from now on.  It may also have the effect of encouraging Chevron executives in the Caspian to pay attention to what Cnooc says at industry meetings.

It also causes political risk specialists at every security and petroleum ministry in the world, and in investment banks and petroleum companies to look at the map of Central Asia, and note that the new BP-operated BTC pipeline from Baku (Azerbaijan) to Tbilisi (Georgia) to Ceyhan (Turkey) opened just weeks ago so the world can access resources from Kazakstan and other Caspian states to the Mediteranian without crossing Russia or Iran. (WSJ) They will then look at the pipeline route that Iran has long said it wants developed from the Caspian south through Iran to the Persian Gulf. These analysts will write memos to file and to their colleagues asking if China is interested in playing in this game of access to Caspian resources?  Seminars on China's plans for the region will be held. Will China try to enhance its postion and Iran's by supporting (finance?) a pipeline across Iran to compete with or dilute the importance of the BTC line, giving Iran added leverage itself in region affairs?  Books will be written. Defense planners will scope out options. Food for thought. Again, normal. But remember: even an aggressive move in capital markets to get energy supplies is better than moving armies to do the job. There’s more money in it too…