The New York Times
June 27, 2005 Monday
Correction Appended
Late Edition - Final
 
SECTION: Section A; Column 1; Foreign Desk; Pg. 1
 
LENGTH: 1630 words
 
HEADLINE: Behind China's Bid for Unocal: A Costly Quest for Energy Control
 
BYLINE: By JOSEPH KAHN
 
DATELINE: BEIJING, June 24
 
BODY:
 
   From the dusty plains of East Africa to the shores of the Caspian Sea, China
is seeking to loosen the grip of the United States on world energy resources and
secure the fuel it needs to keep its economy in overdrive.
 
    Its energy deal-making has cost tens of billions of dollars and has
dominated China's foreign policymaking for the past two years. At times it has
put China in direct competition with American policy goals, especially in Iran
and Sudan, whose leaderships are among the least favored by the United States
government.
 
     Now Washington has the chance to shape China's frenetic quest. The China
National Offshore Oil Corporation, known as CNOOC, has offered $18.5 billion for
the American oil company Unocal. If its bid is successful, Beijing will have a
greater stake in the global oil markets, in the same way that Japanese and
European oil companies work closely with major American companies around the
world.
 
    If the bid were rejected by the United States on national security grounds,
as some members of Congress have publicly advocated, China could be motivated to
build more ties to rogue states and step up its courtship of major oil producers
in Africa and Latin America that in the past have looked mainly to the United
States market.
 
    ''Like other big countries, China naturally wants to share proven oil
reserves,'' said He Jun, an energy consultant in Beijing who advises Chinese oil
companies. ''But if the West treats China as a threat, it will inevitably have
to find its own path to meet its energy needs.''
 
    The energy issue touches all of the hot buttons in China's realm, from its
need to modernize its economy to its tensions with Japan, Taiwan and the West.
 
    Already, Beijing is leaving few holes untapped. Since becoming China's top
leader in late 2002, President Hu Jintao has traveled to Latin America,
Southeast Asia and Africa on missions focused largely on securing energy
supplies that will not pass through American or European companies before
reaching China.
 
    Later this month, he will make his third trip to Russia as president to
continue a lobbying campaign for a pipeline to ferry Siberian crude to Daqing,
China's northeastern oil hub. China hopes the pipeline will reduce its reliance
on American-dominated markets for Middle East oil.
 
    As was the case with Japan in the 1930's, China's relations with the outside
world are being transformed by energy needs, generating fears that it will
compete with the United States for resources. Chinese analysts say the United
States should approve the Unocal deal and work with China to make energy a
common cause, before it becomes a source of tension.
 
    ''Relations between China and the United States are mostly stable, but the
energy problem is the most serious threat,'' said Chen Fengying, a senior
strategist at the government-backed China Contemporary International Relations
Institute in Beijing.
 
    ''We talk about terrorism and Taiwan,'' Ms. Chen said, ''but there is
nowhere near enough attention to energy.''
 
    Just a decade ago China exported more oil than it imported, but last year it
passed Japan to become the world's second-largest importer, after the United
States. Its booming but grossly inefficient economy consumes three times as much
energy per dollar of output than the world average, and oil use has surged along
with the country's auto industry, sprawling cities and new network of
superhighways built on the American model.
 
    Unlike Japan and European nations, which are also big oil importers, China
does not have a strategic alliance with the United States. Beijing has grown
increasingly wary of depending heavily on imports when its companies do not
control major reserves abroad and its navy does not patrol the sea lanes through
which those supplies must pass to reach Chinese ports.
 
    Some foreign economists have criticized China for paying a hefty premium to
control energy reserves abroad when it could pay market prices and have oil
delivered to its door. But China's leaders are wary of entrusting their economic
growth, and perhaps the longevity of the Communist Party, to American oil
companies and the Pentagon.
 
    ''A popular saying abroad is that oil is just a commodity that anyone who
has money can buy,'' Mr. He said. ''But this saying is most popular in the
countries that already control the supplies.''
 
    Shortages of imported oil could threaten China in the event of a conflict
with Taiwan. The United States, which has said it would defend Taiwan if the
Chinese were to attack it, could potentially block shipping in the East China
Sea, crippling Chinese trade.
 
    Partly for that reason, China has scrambled to diversify its oil and gas
imports and transport routes, pursuing oil deals with Russia and Central Asian
nations and signing a preliminary, $70 billion commitment to buy Iranian oil and
natural gas. All of these supplies could be delivered overland if expensive
pipelines that Beijing favors are built.
 
    More generally, China has sent CNOOC and its two bigger state-controlled oil
companies, Sinopec and PetroChina, on a worldwide shopping spree to secure
rights to proven reserves.
 
    This effort has already created diplomatic complications for Washington. For
example, China opposed moves to punish its oil partner Sudan for atrocities in
Darfur and blocked efforts to bring the issue of Iran's nuclear weapons program
before the United Nations Security Council.
 
    Determined to improve ties with Russia, China recently settled a
long-festering border dispute on terms widely seen as favorable to Moscow.
Russia, in turn, has promised to greatly increase oil shipments to China by rail
and has revived discussion of a pipeline to Daqing after earlier arguing that
the project made little economic sense.
 
    Oil is one factor that has plagued relations between China and Japan, which
have jostled for control of natural gas deposits in disputed waters of the East
China Sea. Talks about the issue have stalled, and a Chinese submarine incursion
in that area contributed to a downward spiral in diplomatic ties this spring.
 
    In public, Chinese officials portray their country as a relatively minor
player in global energy markets that seeks cooperative ventures with any country
or major company on commercial terms.
 
    But privately, Chinese officials and analysts say oil is treated as a
strategic crisis. They have sounded the alarm about Western and particularly
American domination of oil supplies and influence over the major oil-exporting
nations, including Saudi Arabia and now Iraq, which has made China dependent on
what many here refer to as American economic and military hegemony.
 
 Beijing this year began construction of a American-style strategic oil
reserve on the coast of Zhejiang province. The first phase includes 52 tanks
that can each hold 25 million gallons of gasoline. Ultimately, officials aim to
create a reserve large enough to allow China's economy and military to function
for at least three months without imported oil.
 
    It has also imposed tough new fuel-economy standards on cars, put some
industries on notice that they will have to become less wasteful users of
energy, and backed an aggressive search for new coal, oil and gas supplies on
Chinese territory to slow the growth in imports.
 
    Ma Kai, China's top economic and energy planner, told officials in a closed
conference recently that the United States was better positioned to withstand
the current rise in oil prices because its major oil companies make enormous
profits to offset the losses to the American economy. Importing countries with a
smaller stake in global energy trading, like China, have nothing to soften the
blow of the huge losses they suffer when prices rise, Mr. Ma said, according to
a Chinese energy expert who attended the session and asked to remain anonymous.
 
    This expert said Chinese leaders were well aware that they are paying
inflated prices for foreign assets. Proposed pipelines connecting China to Iran,
Kazakhstan and Russia and a Chinese-backed pipeline project in Brazil will cost
the country dearly, pushing the price of oil from those sources to double or
triple spot-market prices.
 
 CNOOC's bid for Unocal, which would be financed primarily by loans from
state-run banks and the company's state-owned parent, offers a substantial
premium for the company's assets. But the extra cost is worth it for the sake of
political security, many Chinese argue.
 
    In that sense, the CNOOC offer might be seen in a different light than some
other high-profile overseas acquisitions by leading Chinese companies. TCL's
purchase of Thompson's television unit, Lenovo's takeover of I.B.M.'s laptop
computer line and Haier's proposed purchase of Maytag are all driven primarily
by commercial concerns.
 
    Whether Chinese companies paid a good price for those assets has been
debated, but the motivations for purchasing consumer product lines stem mainly
from a desire for global brand names and marketing skills, rather than politics,
local analysts said. That may be less true of CNOOC's bid.
 
    ''The CNOOC arrangement has both commercial and political factors involved,'
' said Mr. He, the energy consultant. ''Some of the commercial terms, frankly
speaking, are questionable. But the political factors are very clear and
straightforward.''
 
 Wenran Jiang, an expert in Chinese foreign policy at the University of
Alberta, said many in the West viewed the Unocal offer as part of China's
coordinated assault on foreign markets, a sign of economic vigor. In China, he
said, the energy quest is seen as a belated, disorganized, even desperate rush
to meet basic security needs.
 
    ''They feel threatened, with their back in a corner, forced to pay high
prices to Western companies,'' Mr. Jiang said. ''For them, this is a matter of
the survival of the regime.''
 
 
URL: http://www.nytimes.com
 
CORRECTION-DATE: June 29, 2005
 
CORRECTION:
 
   A front-page article on Monday about the energy issues that have dominated
China's foreign policy misstated the country's ranking among oil users. It is
the second-largest consumer, after the United States, not the second-largest
importer.
 
GRAPHIC: Photo: A natural-gas processing plant off Thailand is owned by a
subsidiary of Unocal, the American oil company that China has offered to buy.
(Photo by Unocal)(pg. A9)
 
LOAD-DATE: June 27, 2005