China: The Great Grab

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When Chevron, one of the world's oil giants, announced in early April that it was buying Unocal, a smaller rival, for about $17 billion, it seemed like business as usual in the oil patch: the big getting bigger by swallowing the not quite so big. Across the Pacific, though, management at Chinese National Offshore Oil Corp. (CNOOC), one of China's largest oil firms, was still pursuing what it calls "Operation Treasure Ship." Unocal, some at CNOOC think, fits perfectly into China's fervent effort to secure new oil and gas supplies to fuel its surging economy. Within the next month, CNOOC may make a counteroffer for Unocal, the world's ninth-largest oil company. If it does—and the possibility was the hotly debated topic at the Chinese company's Hong Kong board meeting last week—it would mark the first major takeover fight between a U.S. company and a Chinese competitor.

A bid for a large U.S. oil company would further complicate an already tense trade relationship between the U.S. and China. U.S. Treasury Secretary John Snow kept up public pressure on Beijing last week to revalue its currency, the renminbi, a move that Washington believes would brake China's surging trade surplus. China has also announced tariffs on its own exports of textiles to pre-empt possible moves by Europe and the U.S. to protect home markets. In this environment, the purchase by a state-owned Chinese oil producer of a U.S. rival no doubt would stir controversy. But in the global oil patch, China's surging appetite for reserves is now a fact of life. "Welcome to the oil business of the 21st century," says a senior executive at a major U.S. oil producer. "This is the new world."

Or rather, it's the new version of the old world. In the early 20th century, as the age of oil dawned, the globe's imperial powers— Britain, Germany, Russia—jousted for control of newly discovered oil fields in the Caucasus, Central Asia and later the Middle East. The struggle became known as the Great Game. A century later, the game is on again as China scrambles to secure its energy future, roiling markets and even ensnaring the U.S.'s Middle Eastern policy in the process. In the past year China's energy companies have signed deals for oil reserves in Africa, Iran and Canada. In Russia, Beijing has lobbied hard against Japan for a pipeline to bring Siberian oil east to China. And last week Chinese Premier Hu Jintao welcomed Uzbekistan President Islam Karimov to Beijing just weeks after the Uzbek military killed nearly 200 after unrest erupted in the Central Asian country. The U.S. has been critical of Karimov for his heavy hand. Not Beijing. Among the main reasons for Karimov's visit: to sign a $600 million energy deal between the two countries.

Competitors are worried that China is so eager to do deals that it will warp the market. Western oil majors are concerned that "they won't be able to compete," according to Gary Ross, CEO of Petroleum Industry Research Associates, because the Chinese companies, most still state owned, are "willing to accept a lower rate of return." Those concerns may be overwrought. To acquire Unocal, CNOOC (whose market capitalization is about $22 billion) would have to offer more than $17 billion, plus pay the $500 million breakup fee Chevron booby-trapped to its Unocal bid. "It's all about money," says a banker close to CNOOC. "Nothing else."