By All Means Necessary (21 page)

There is, however, enormous variation within Canada; views of people in resource-rich provinces contrast sharply with the overall national mood. Thirty-one percent of Ontarians polled disagreed that Asian economies are vital to the well-being of Canada, but in oil- and gas-producing Alberta, 74 percent of respondents believe Asian economies are beneficial to Canadian well-being.
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This regional variation in response to FDI dates back at least to the 1970s.
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It was against this backdrop that, in December 2012, the Canadian government approved CNOOC's bid to acquire Alberta-based Nexen. But it appeared to make new policy in the process. “In light of growing trends and following the decisions made today, ” Prime Minister Stephen Harper declared, “the government of Canada has determined that foreign state control of oil sands development has reached the point at which further such foreign state control would
not be of net benefit to Canada.”
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He appeared to leave little room for exceptions, asserting that Canada “will find the acquisition of control of a Canadian oil sands business by a foreign state owned enterprise to be of net benefit, only in an exceptional circumstance.” Harper also elaborated the grounds on which future proposals would be assessed. They included the degree to which any state-owned enterprise would control the target firm and the industry in which it operated, and the degree to which the firm itself was controlled by its government.

Many observers in Canada, however, assume these announcements will have limited practical effect, and the federal government will declare “exceptional circumstances” whenever necessary to allow a major deal to go through.
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It is unclear whether any other state-owned enterprise—particularly a Chinese one—will even test it. Another large acquisition attempt will almost certainly reignite intense public debate.

The U.S. experience with Chinese resource investment has been decidedly different from those of Canada and Australia. The U.S. economy is much larger than Canada's and Australia's, and resource industries play a considerably smaller role. Moreover, until recently, most U.S. resource sectors were considered relatively mature, leaving limited room for new investment; in addition, with a large pool of domestic capital available, the United States depends less on foreigners to support whatever opportunities do exist. As recently as 2008—before the financial crisis hit and resource prices plunged—foreign direct investment in U.S. mining and petroleum production stood at just under $17 billion, of which $14 billion went into oil and gas.
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That year, roughly 0.1 percent of total inward investment in the United States came from China.
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Indeed, prior to 2010, Chinese firms had invested no more than $250 million total in U.S. energy firms and projects in any one year.
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Even today, Chinese investment in basic materials, which
includes minerals extraction but also encompasses manufacturing, remains tiny.
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Agriculture has similarly stayed on the sidelines, with a mere $120 million in Chinese investment as of the end of 2012.
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In 2010, though, the tide began to shift on one important front: energy. U.S. oil and gas output was booming, making the United States an increasingly attractive target for energy investment. Chinese energy investments totaled $3 billion in 2010, $2.2 billion in 2011, and $3 billion again in 2012.
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U.S. oil and gas production was being propelled upward by new technology: producers combined horizontal drilling, in which they drill down as much as a mile before turning ninety degrees and drilling sideways, with hydraulic fracturing, which uses pressurized liquids and sand to fracture dense rock and allow oil or gas to flow. As with the case of Nexen, Chinese firms were attracted by two prospects. The first was the simple ability to put more oil and gas on their books. The second, even more powerful in this case, was the chance to learn about a new technology.

Chinese firms have approached U.S. oil and gas gingerly. To date, they have taken only minority stakes in U.S. firms, or they have co-invested (with minority shares) in individual production projects. They have also worked with smaller independent operators, who are hungry for cash, rather than with major U.S. oil and gas producers. These investments in U.S. oil and gas production have gone smoothly in recent years. In October 2010, CNOOC acquired a 33 percent stake in the shale gas pioneer Chesapeake Energy in a deal ultimately worth $2.2 billion, and in January 2012 Sinopec took a similar stake in another shale gas leader, Devon Energy, for slightly more. The Chinese sovereign wealth fund CIC has also invested $500 million in Cheniere Energy Partners Limited, an aspiring exporter of liquefied natural gas. More recently, Chinese companies have begun to take minority positions in shale oil production too.

This pattern, which avoids trying to take a controlling interest in any large U.S. oil and gas producer, is likely a preemptive defense against public and political opposition. Mergers, acquisitions, and other takeovers of U.S. commodity producers by foreign entities
(including the Chinese) face scrutiny from the Committee on Foreign Investment in the United States (CFIUS). Initially established through an executive order by President Gerald Ford in 1975, CFIUS now derives its power from legislation passed in 1988, which allows the president to “block foreign acquisitions of U.S. firms that threaten to impair the national security.”
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Administering this presidential authority is CFIUS, an interagency group chaired by the Treasury Department.

There is disagreement over whether acquisitions of U.S. commodities producers (or of natural resource deposits themselves) are subject to scrutiny for their strategic implications under current statute. Some analysts argue that economic issues are exempt from CFIUS oversight. Analysts Daniel Rosen and Thilo Hanneman, for example, have written that “the review process does not include national economic security, protecting U.S. economic strength as a general contribution to national power, or other considerations.”
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Others have noted that the underlying statute places no specific limits on the scope of what might be included under the rubric of national security, and they contend that economic security can play an important role.

Precedent suggests a narrow focus on espionage concerns rather than broad economic security issues. For example, CFIUS scrutiny of the acquisition of Global Crossing, a telecommunications firm, by a Hong Kong–based company with ties to the Chinese military focused on risks to secure communications for U.S. law enforcement. And a presidential order (on CFIUS's recommendation) prevented the acquisition of an Oregon wind farm by the Chinese firm Ralls Corporation, reportedly due to the wind farm's proximity to U.S. military installations rather than any energy concerns.

Only two Chinese natural resource acquisitions have attracted significant CFIUS-related concerns. Most recently, the 2012 CNOOC bid for Nexen was submitted for CFIUS review, since a small part of Nexen's holdings were in the U.S. Gulf of Mexico. After some initial noises of concern—one senator suggested that China be required to give equal access to U.S. oil and gas investors before the acquisition be allowed to proceed—the
process moved forward quietly. (The lack of a rival bidder, along with the limited U.S. leverage over an acquisition of a company whose assets were mostly outside the United States, undoubtedly contributed.) The main concerns raised during the process related to intellectual property, cybersecurity, and proximity of some drilling platforms to sensitive military installations; however, CFIUS approved the deal in February 2013.

For Chinese companies and political leaders, though, the 2005 attempt by CNOOC to acquire California-based Unocal looms largest, and it still colors their thinking. On June 23, 2005, CNOOC made an unsolicited $18.5 billion bid to acquire Unocal, which was equal to $67 per share—all in cash—and resoundingly trumped Chevron and UNOCAL's provisional April 2005 deal worth $16.5 billion in cash and stock options. CNOOC and Chevron began aggressive lobbying campaigns in Washington during June and early July 2005. On June 30, the House of Representatives passed a resolution calling for a “thorough” CFIUS review of the deal, and CNOOC filed a voluntary notice with CFIUS on July 2.
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On July 19, Chevron upped its offer by $1.2 billion, to $63.01 per share, from about $60.50.
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CNOOC countered with an offer of $69 per share, but according to the
Associated Press
, the company would increase the offer only if “Unocal agreed to pay the $500 million cost of terminating the Chevron deal and lobby for the deal in Congress.”
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CNOOC ultimately withdrew its bid on August 2, a little more than a week before UNOCAL's board agreed to accept Chevron's revised bid on August 10. Ultimately, CNOOC's bid was not blocked by CFIUS but was instead rejected by Unocal in favor of a competing offer that did not raise similar regulatory risks. This has not stopped many people in both China and the United States from misremembering the episode as one in which CFIUS actually rejected the acquisition.

The CNOOC-Unocal experience cooled Chinese interest in major U.S. oil and gas acquisitions. Days after the U.S. House of Representatives voted to approve a resolution calling for President George W. Bush to block the CNOOC-UNOCAL deal on national
security grounds, China's Foreign Ministry issued a strongly worded written statement:

We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries….CNOOC's bid to take over the U.S. Unocal company is a normal commercial activity between enterprises and should not fall victim to political interference.
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In August 2005, a CNOOC spokesman in Hong Kong was quoted, saying about the UNOCAL deal, “Are we pissed off? Yes.”
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More than a year and a half after the UNOCAL bid failed,
Reuters
reported that a senior Chinese official and vice chairman of the National Development and Reform Commission, Zhang Guobao, had an angry exchange with the American ambassador, saying “If the United States would not allow CNOOC to purchase Unocal, will not itself guarantee China a steady energy supply, and opposes Chinese purchases of Iranian oil and gas, how can China survive?”
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Learned lessons can still be observed in changed tactics on the part of Chinese oil companies. In particular, companies shifted to taking minority stakes in American firms rather than making outright bids. Fu Chengyu, the chairman of CNOOC who led the ill-fated 2005 bid for UNOCAL, later successfully led CNOOC's entrance into the U.S. shale industry through two joint ventures with the American firm Chesapeake Energy in 2010.
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These agreements gave CNOOC minority stakes in shale fields in Wyoming, Texas, and Colorado.
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Fu, who has since been moved to head up Sinopec, pursued a diversification strategy focused on multiple smaller investments and pursuit of minority stakes, with a particular focus on taking advantage of “[tapping] foreign management expertise, ” that was shaped by the lessons of the UNOCAL bid—a lower-key strategy that has seen success.
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The one area other than oil and gas in which Chinese investment might raise strategic concern is rare earth metals. As in Australia, it is reasonable to worry that Chinese companies may not focus only
on resources where China is relatively poor but also target minerals where it already has a strong position—most notably rare earths. The risk is that through commercial acquisitions China could eliminate competition in areas where it has already attempted to exploit a near-monopoly position. Projects underway with high concentrations of heavy rare earths—essential to many defense and clean energy technologies—are found in China, Canada, the United States, South Africa, and Sweden.
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With only five or six proposed heavy rare earth projects “sufficiently advanced in their development to have a shot at making it into production, ” and only one in the United States, acquisition of even one U.S. venture could have upended the structure of the international market.
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Any attempt by China to do that would likely provoke strong opposition within the United States.

With limited exceptions, then, U.S. precedent is one of a relatively hands-off approach to acquisitions, but also one in which particularly sensitive acquisition attempts are discouraged (and thus usually avoided) in the first place. The United States has not shown an interest in imposing extensive conditions on investment in the same way Australia has. Nor have U.S. policy makers expressed concern about excessive SOE activity in strategic energy industries in the way Canada has. But U.S. policy has not been aggressively tested since the unfolding oil and gas boom made the country a far more attractive target for investment. If a Chinese company breaks precedent and attempts to take over a major U.S. producer, it will be a novel test of whether the United States sticks to past practice or develops new rules of the road.

The experiences of Australia, Canada, and the United States with Chinese resource investment have differed decidedly from those in the developing world. Rather than focusing on environmental, labor, or fiscal challenges, these countries have emphasized national sovereignty and “strategic” concerns in their governance of Chinese investment. So far all three countries have taken a largely ad hoc
approach, developing policy on a case-by-case basis shaped by a mix of national interest calculations and political and popular pressures. Canada and Australia have had tougher decisions to confront, with big Chinese acquisition attempts in recent years, while the United States (as of late 2013) has been spared any major acquisition attempts since 2005. Each country has adapted at the margin to Chinese companies' efforts to invest, but none has shifted radically. Instead it has been China and its companies that have had to change most. The United States, however, has not recently been forced to reckon with high-profile Chinese investments in the same way Canada and Australia have. It is thus arguably the most likely to go through significant change in response to Chinese investment in the coming years.