But the subject of buying Unocal had never before been discussed at a board meeting—which meant that when they sat down with CNOOC's CEO Fu Chengyu and other top executives on March 29 in a conference room at the Island Shangri-La in Hong Kong, they were in for a shock. CNOOC, Fu told them, was ready to make a play for the Los Angeles-based oil company. "The ship was about to leave the port, and the [directors] hadn't even known there was a ship," says one adviser to CNOOC with knowledge of the meeting.
In the months since, CNOOC's $18.5 billion bid for Unocal—which threatens to trump a rival $16.5 billion offer by Chevron—has created a storm of opposition in Washington. To CNOOC's surprise and dismay, its bid has become a locus for all the angst some Americans feel about China's rising economy, adding further tension to already strained trade ties between the U.S. and China. The U.S. House of Representatives passed a resolution on June 30 warning that the proposed acquisition poses a threat to national security and urging the Bush Administration to block any deal.
Obscured by the political hysteria is the fact that, according to U.S. Securities and Exchange Commission (SEC) documents seen by TIME, CNOOC, not Chevron, was actually Unocal's first choice as a merger partner. Some beltway politicians would paint CNOOC, which is 70% state-owned, as an arm of a Communist government out to strip the U.S. of vital energy supplies. TIME's reporting on the genesis of CNOOC's Unocal bid—dubbed "Operation Treasure Ship" by the Chinese company's investment bankers—reveals a far more complicated reality. CNOOC is a flagship Chinese firm determined to emerge as a major player in the global oil business, rewarding its shareholders in the process. The Unocal bid was its coming-out party, but at times, for Fu Chengyu & Co., it's been anything but fun. It has, so far, shown top management to be not completely fluent in Western-style corporate governance, or aware of the political backlash its acquisition attempt might spur across the Pacific.
CNOOC is not the typical, lumbering, command-economy-era dinosaur that still plagues corporate China. In early 2001, it sold a 30% stake in the company to the public, and these shares trade freely on the Hong Kong and New York stock exchanges. CNOOC officials take pride in their success at running an outward-looking firm that generally operates without Beijing's direction. The company is overseen by a strong eight-person board that includes four foreigners as nonexecutive, or outside, directors.
In fact, CNOOC's top management may have underestimated just how seriously its outside directors took their role. When it became clear at the meeting in late March that the board had been left mostly in the dark about CNOOC's plans for Unocal, a few outside directors, including former Swiss ambassador to China Erwin Schurtenberger and Goldman Sachs Asia vice chairman Kenneth Courtis, rebelled, forcing Fu to pull back just as Operation Treasure Ship was about to set sail. Ever since, CNOOC has had to play catch-up against Chevron in the fight for Unocal.
The board's revolt in March reflects the growing pains that an ambitious Chinese company is going through even as it tries to present a confident face to the world. Indeed, the issue of what CNOOC's board knew and when remains a touchy subject for Fu as the takeover fight progresses. In an interview with TIME, he declined to say exactly when he told his board of his intentions toward Unocal. But the reason for the board's initial ire is clear: according to SEC documents, as far back as December, Fu had directly discussed the possibility of acquiring Unocal with the California firm's CEO, Charles Williamson. For CNOOC, the potential magnitude of the deal (the companies are of similar size) was breathtaking, and the risks involved—from the debt CNOOC would have to take on to finance an acquisition, to a possible downturn in oil prices—were substantial. That Fu hadn't informed the board of his thinking, or of his conversation with Williamson, infuriated several of its members.