CNOOC cites political opposition in the U.S. in abandoning its offer for the oil company. The move clears the way for Chevron's purchase. By Don Lee and Elizabeth Douglass, Times Staff Writers SHANGHAI — The Chinese oil company battling to buy Unocal Corp. abandoned its effort Tuesday because of what it termed "regrettable and unjustified" U.S. political opposition, ending a showdown that spotlighted American concerns about energy security. The decision by CNOOC Ltd., largely owned by the Chinese government, to drop its $18.5-billion bid for Unocal clears the way for Chevron Corp. to acquire the El Segundo-based company in a deal currently valued at $17.5 billion. It also cuts short the biggest takeover attempt made by a Chinese company for a foreign firm. CNOOC's play for the U.S.' eighth-largest energy company represented China's aggressive global push to secure energy resources. But the furor that it generated in Congress underscored the increasing economic and political competitiveness between the United States and a rapidly rising China. And even though analysts said CNOOC's failed bid could give other acquisition-minded Chinese companies pause as they look to build their brands and compete on a global scale, it's not likely to end their interest in buying U.S. companies. "This is a wake-up call that China is sitting on a big pile of dollars, and they've got to spend it somewhere," said Richard C. Bush, a former U.S. intelligence official now at the Brookings Institution. "It seems clear they want some of them to occur here." CNOOC's withdrawal from the contest appeared increasingly likely in recent days as American political objections mounted and Unocal's board of directors swung its support behind Chevron's competing bid — which will be voted on by Unocal shareholders a week from today. CNOOC's management in Beijing, led by the Western-educated oilman Fu Chengyu, considered sweetening its bid for Unocal but concluded that it wasn't worth it, given the obstacles imposed by Washington. An energy bill passed by Congress last week would have delayed a CNOOC acquisition of Unocal by at least 120 days. An influential shareholder advisory firm estimated that such delays would reduce the value of CNOOC's offer by at least 5%. The hostile political climate created "a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction," CNOOC said in a statement. Fu wasn't available for comment, but a CNOOC spokesman left no doubt about the company's bitterness. "Are we pissed off? Yes," said Tim Payne, a CNOOC spokesman in Hong Kong. Some shareholders and analysts also were disappointed. They were hoping for a bidding war — and a higher price. "It's not the best outcome for Unocal shareholders," said Fadel Gheit, energy analyst at Oppenheimer & Co., who owns Unocal and Chevron shares. "I think it's more that CNOOC lost Unocal than that Chevron won Unocal." There was no immediate reaction from the Chinese government. A month ago, China's Foreign Ministry excoriated American politicians for interfering with what it called a routine business deal. Some members of Congress, however, raised the specter of CNOOC's bid as a security threat to the United States, although most experts said there was little evidence to support that claim. Other U.S. politicians complained that CNOOC had unfairly used its links with the communist government in Beijing to obtain cheap financing for the deal. The state-controlled China National Offshore Oil Corp. owns 71% of CNOOC, with the rest owned through publicly traded stock. CNOOC, while insisting that it was run independently, acknowledged that it had lined up loans from government-controlled entities at very favorable terms. Rep. Richard W. Pombo (R-Tracy), who pushed the energy bill amendment mandating additional review of any CNOOC-Unocal deal, said the Chinese company's decision to pull out was "good news for the free markets, the American consumer and U.S. national security." But American businesses have expressed fears that the political reaction in Washington over the CNOOC affair could trigger a backlash in China that would prove costly for U.S. companies. China, with its low-cost manufacturing base and booming consumer market, has been an irresistible — and potentially profitable — market for corporations ranging from Wal-Mart Stores Inc. to Microsoft Corp. Analysts say the Chinese government could retaliate by cutting purchases of U.S. goods or delaying approvals for American corporate initiatives in China. That could worsen bilateral relations that are already strained by trade disputes over textiles and recent statements by U.S. defense officials that China's military buildup poses a threat to the region. "To many corners in Beijing, [the CNOOC outcome] is further proof that the U.S. government and certain people in the administration are trying to block China's rise," said Wenran Jiang, a political scientist specializing in Chinese affairs at the University of Alberta. Jiang and other analysts said many Chinese might accuse the United States of applying a double standard in its treatment of CNOOC's bid, subjecting it to special scrutiny at a time when the U.S. is calling on China to operate under rules of free trade and a market-based economy. He said CNOOC's effort to buy Unocal fit well with Beijing's strategy of expanding its search for energy resources beyond politically sensitive areas such as Sudan and Iran. With most of Unocal's assets in Asia and its oil production comprising of just 1% of U.S. consumption, Chinese officials didn't expect the CNOOC bid to ignite such political uproar. "It's a bitter lesson," Jiang said. Nonetheless, China isn't expected to stop pursuing its global hunt for energy resources. In addition, said Donald Straszheim, a Los Angeles economist who focuses on China's business and economy, the nation's manufacturers are poised to "expand their reach by buying overseas brands" to acquire technology, global recognition and management skills, as Beijing-based Lenovo Group Ltd. did with its purchase of IBM Corp.'s personal computer business this spring. More recently, Chinese appliance maker Haier Group joined with two U.S. firms in a bid for Maytag Corp., but dropped out last month in the face of a higher bid from Whirlpool Corp. Many Chinese companies are cash-rich and the recent appreciation of China's currency, an action taken by Beijing at the behest of American politicians, will give the Chinese even more buying power abroad. That could engender further ill will in the United States, although not the kind of opposition triggered by CNOOC's foray into an industry that many consider vital to America's national interest. When CNOOC made its unsolicited bid for Unocal on June 22, company executives expressed confidence that their superior bid would give them an edge. Over the last two decades, CNOOC had built a reputation as a well-run company with an unusually strong Western orientation. The company's board conducted its meetings in English, and its 54-year-old chairman, Fu, who earned a master's degree in petroleum engineering from USC, was known for his American management style. Internally, CNOOC dubbed its bid for Unocal as "Treasure Hunting Ship," an apparent reference to the 15th century Ming Dynasty voyager Zheng He, who was known for leading an armada to the "western ocean." Although Unocal is small compared with major multinational oil companies, its allure is its substantial holdings of natural gas and oil in Asia, which is fast becoming one of the strongest energy markets in the world. In addition, Unocal is a world leader in deep-water drilling, and has several such projects underway in the Gulf of Mexico. To improve its chances, CNOOC followed the protocol of a savvy American company, lining up two of Wall Street's top investment banks, as well as a team of lawyers, public relations specialists and consultants in Asia and the United States to advise it on the deal and strategy. CNOOC sought to deflect political opposition by voluntarily seeking a quick U.S. government review of the deal, offering to divest certain Unocal assets and pledging to retain Unocal's workforce and management. An advisor to CNOOC said Tuesday that more Unocal employees faced the loss of jobs in a merger with Chevron than CNOOC. Neither Unocal nor Chevron would quantify possible cuts, and had no official comment on CNOOC's decision. If a Unocal-Chevron deal is completed this month, as is now expected, layoffs would most likely come in El Segundo, Unocal's headquarters, where 128 people work. Analysts said that unlike CNOOC, Chevron was a known quantity and it would be easier to blend the cultures and operations of two California firms than those involving companies operating across the ocean. CNOOC's advisors said it was clear that they and management at the Chinese firm underestimated the degree of political resistance in Washington, a feeling intensified by the large U.S. trade deficit with China and complaints about Chinese competition from American small businesses and manufacturers.