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Eric Ng

With talks stalled amid US hostility, the Chinese giant has about three weeks left to make a viable offer

Negotiations between CNOOC and acquisition target Unocal remain deadlocked, leaving the Chinese oil firm just over three weeks to produce a viable bid.

Its all-cash US$67 a share offer for the US oil firm trumps that of Chevron, which has so far stuck by its US$60 cash-and-shares proposal, but CNOOC has thus far to win over Unocal's board of directors.

'The talks are obviously in a very critical stage. The reality is that the ball is still in everybody's court,' a source close to the situation said.

Unocal shareholders are scheduled to meet on August 10. For now, only Chevron's bid - which still  has the official recommendation of the board - is on the agenda.

'We have no comment on the status of issues before the board,' a Unocal spokesman said yesterday. 'The board continues to evaluate the CNOOC proposal in a manner consistent with its fiduciary responsibilities and its obligations under the Chevron merger agreement.'

Complicating the talks is the hostile political rhetoric emanating from Washington, where senators and congressman from both sides of the aisle have moved to scuttle any deal that would put 'American petroleum' in the hands of the 'Chinese Communist government'. CNOOC's unlisted parent firm is wholly state-owned.

While US federal regulators have already cleared Chevron's bid, regulatory approval of CNOOC's bid is far from assured in the present climate, raising fears among Unocal shareholders that any agreement with the Chinese firm may be doomed.

Overcoming these fears will take cash. Unocal directors will seek to extract as much as they can from the Chinese firm, which would double its Asian oil and gas reserves through the acquisition.

The Chinese firm  has agreed to set up a US$2.5 billion compensation fund deposit at US investment bank JP Morgan, against which Unocal shareholders can make claims should CNOOC walk away from a potential takeover agreement.

Unconfirmed reports  by US media outlets have said that CNOOC's board had already authorised a new bid of US$69 per share. CNOOC will also have to pony up a US$500 million kill fee to compensate Chevron for the dissolution of its contract.

'We are still continuing the negotiations and remain confident of a positive outcome,' a CNOOC spokesman said yesterday. 'We continue to believe our offer is superior to that of Chevron.'

However, its prospects for success appear bleak judging by the prevailing mood in Washington, where CNOOC-bashing has become virtually de rigueur.

'CNOOC's bid is part of an ominous Chinese strategy to replace the US as the world's foremost economic power,' said Frank Gaffney, an analyst with the conservative Centre for Security Policy who has been quoted heavily in the American press recently.

Last week, Californian Republican Richard Pombo, chairman of the House Resources Committee,  proposed a provision to a pending energy bill that would require the US Department of Energy to review the CNOOC bid and assess its implications for US energy security.

If passed, it would pre-empt a review by the White House-backed Committee on Foreign Investments in the United States, which has declined to act until a deal is actually signed.

On Friday, Senator Byron Dorgan, a Democrat from North Dakota, proposed a bill that would prohibit the sale of Unocal to CNOOC outright. It has been sent to the Judiciary Committee and has yet been scheduled for consideration.



CNOOC faces crunch time on Unocal