In offering to buy United States oil company Unocal Corp for US$67 per share, CNOOC has shown it is prepared to pay elevated prices for international oil and gas reserves. However, paying a high price is not the same as paying too much. Observers who accuse the Chinese company of overpaying on a simple comparison with Chevron Corp's rival bid of US$65 a share are using the wrong benchmark to evaluate CNOOC's offer. Critics note CNOOC will have to pay a US$500 million penalty for breaking Chevron's agreed bid and will not reap any of the US$350 million a year in cost savings that Chevron can expect. But the Chinese company stands to make some powerful gains from the acquisition. With the equivalent of 1.75 billion barrels of oil in proven reserves, mostly in Asia, buying Unocal presents a rare opportunity for CNOOC to boost its reserves by 80 per cent in the region where it most wants to expand. Given that it would struggle to make the same headway through internal growth or a string of smaller deals, the advantage is well worth a sizeable premium. Factoring in US$1.1 billion in net debt, CNOOC's offer places an enterprise value of US$19.6 billion on Unocal. That is high compared with CNOOC's market capitalisation of US$22.5 billion, and other companies in CNOOC's position would find it tough to finance such a big acquisition. But CNOOC's state-owned parent has deep pockets and good friends at China's state banks, which has allowed it to put together a favourable US$16 billion borrowing package for its all-cash offer. The key is a US$2.5 billion interest-free bridging loan from its parent, to be refinanced with an equity issue in two years, and a US$4.5 billion 30-year subordinated loan at an interest rate of just 3.5 per cent. That will count nearly as equity for credit-rating purposes. Although Standard & Poor's yesterday put CNOOC's BBB-plus rating on negative credit watch following the bid's announcement, the ratings agency said that it was unlikely to downgrade CNOOC below BBB-minus to junk status. 'Clearly, this is a transaction we can afford,' boasted CNOOC chairman Fu Chengyu. Measured in terms of reserves, the deal still looks expensive, but not wildly so. An enterprise value of US$19.6 billion equates to US$11.2 for every equivalent barrel of oil of Unocal's reserves; in line with its international peer group. But Unocal would bring CNOOC far more than just reserves. In effect, CNOOC would be buying a fully functioning international exploration and production arm. With its first-class management and operational know-how, as well as advanced deep-sea drilling technology, Unocal offers CNOOC a ready-made platform for further international expansion. Far from planning to shut Unocal's El Segundo, California headquarters, as Chevron would almost certainly have done, CNOOC yesterday pledged to retain all Unocal's US management and staff. 'Over time, Unocal will become the entity to manage the international assets of CNOOC,' chief financial officer Yang Hua said. That makes sense for CNOOC, which has ambitions to become a major international energy company, and it could also prove the critical factor in overcoming US political resistance that has threatened to block CNOOC's bid.