1. TEMPLATE
Gelila Haile
I.H. Kempner High School
Gifted and Talented Mentorship Program
King and Spalding LLP.
Denis A. Fallon, J.D.
May 25, 2011
Overview
The oil and natural gas industry currently plays a crucial role in global
markets. Exploration and production techniques in one country can
impact the same process in other countries around the world. U.S.
companies have utilized unconventional drilling technology to discover
natural gas in shale plays, which are deep rock formations, making the
country a leading site for inbound investments from foreign
companies. However, in recent years, certain foreign enterprises with
the intention of investing in American companies have encountered
opposition from political groups, and such controversies have led to
failed transactions.
By comparing two different investments attempted by the China
National Offshore Oil Corporation (CNOOC) in the United States before
and after the recession, this project aims to analyze the determent
factors in successful and unsuccessful transactions. While the first
transaction in which CNOOC attempted to acquire Unocal, a California-
based oil company, faced criticism and scrutiny from Congress, a
recent transaction with Chesapeake Energy, a natural gas producer,
successfully closed with little to no opposition.
Background Information
• China National Offshore Oil Corporation
(CNOOC)
A state owned company, CNOOC is China's largest producer of offshore
crude oil and natural gas and one of the largest independent oil and
gas exploration and production companies in the world.
Headquartered in Hong Kong, CNOOC mainly engages in exploration,
development, production and sales of oil and natural gas.
• Union Oil Company of California (Unocal)
Founded in 1890, Unocal was a leading petroleum exploration and
production company. Originally based in Santa Paula, California,
Chevron acquired the company in 2005 for $ 16 billion after CNOOC
withdrew its bid.
• Chesapeake Energy Corporation
The second-largest U.S. producer of natural gas, a top 20 producer of
oil and natural gas liquids, and the most active driller of new wells in
the U.S. Chesapeake is headquartered in Oklahoma City.
Eagle Ford Shale: A shale gas play is simply a discovery of oil or
gas in shale rock that is significant enough for oil and gas companies to
launch a campaign of leasing and subsequent exploration. In the case
of the Eagle Ford shale, it is a hydrocarbon producing formation of
significant importance due to its capability of producing both gas and
more oil than other traditional shale plays. Eagle Ford, Texas is locate 6
miles west of Dallas and covering 26 counties in south Texas.
Comparison of Unocal and Chesapeake Factors to Consider for a Successful
Transaction
When considering whether to invest in companies in the United States,
foreign enterprises should be familiar with the CFUIS review process for
inbound transactions. Companies should ask whether the transaction will
cause a dramatic change of control over the U.S. company, whether the
transaction includes acquisition of a U.S. company having technology
sensitive to national security, and whether the acquired U.S. company is
publicly recognized and sells products, such as oil and gas, to consumers.
Is failing to submit the CFIUS Review worth the risk?
If a company decides to forgo submitting their transaction with a foreign
company to a CFIUS review, then they can risk having the deal unwound
by the President in the future. However, the immediate advantage of not
submitting the transaction is avoiding possible rejection and investigation
for a short term deal.
[1]
Acknowledgments
1. treasury.gov
2-sec.gov
3-iie.com-Institute for International Economics
4-US National security and Foreign Direct Investment preview – Chapter 5
5-Oil and gas breif.com
6-usatoday.com/money/industries/energy.com
7-chinadaily.com
China National Offshore Oil Corporation (CNOOC) in
North America: A Comparative Study of the Unocal
and Chesapeake Investment Ventures
Unocal Chesapeake
Bid Amount $18.5 billion in cash, $2.5
billion more than Chevron’s
offer
$1.08 billion in cash, $40 million
at closing, $1.08 for further
development, totaling $ 2.2
billion [2]
Type of
Transaction
Attempted acquisition of all
common stock, giving CNOOC
control over the Board of
Directors
33% undivided interest, no
common stock interest issued to
CNOOC
CFIUS
Review
Based on the Exon-Florio
Amendment of 1988, members
of the House proposed that
CFIUS should review the bid.
Congress then asked for a
potential 141 additional days
for CFIUS to review the bid,
which led to CNOOC’s
withdrawal [5]
No concrete evidence that a
review was completed. Such
data is not available to the
public. However the transaction
successfully closed on November
18, 2010
Technology
and National
Security
Concerns
Underwater Terrain Mapping
technology used for offshore
oil exploration could also be
used in navigation for the
Chinese military’s growing fleet
of submarines
Hydraulic fracturing and
horizontal drilling are considered
beneficial to national security
since U.S. can rely less on other
countries for importing oil and
gas. It insures job security and
development.
Political
Atmosphere
With the proposed bid on hold,
the US House and Senate asked
President Bush to review the
transaction based on a national
security threat. On July 15,
2010 Senator Dorgan
introduced a bill in the U.S.
Senate that would block
CNOOC’s acquisition of Unocal
Since the transaction occurred
during a period of political
transition, Congress was
occupied with other major issues
[7]
Economic
Atmosphere
Oil prices rose above $61 a
barrel and finished 40% higher
than they started in 2005. In
addition to the 80% surge in
gas prices, the idea of having
American oil reserves
controlled by CNOOC
concerned citizens that
supplies could be directed to
foreign markets –[6]
As the 2008-2009 recession
slowly started to improve,
Chesapeake and other
companies in the U.S. needed
money to develop their
businesses. The deal, therefore,
increased cash flow into
Chesapeake, helping it emerge
out of the recession