In Seeking Unocal, Chevron Ruffles an Asian Partner
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By JAD MOUAWAD and DAVID BARBOZA
Published: July 5, 2005
The last thing Chevron wanted when it made its $16.8 billion offer for
Unocal back in April was to be pitted in a takeover battle against the
After all, one of the main reasons it went after Unocal, a California-based
independent oil company with vast resources in Asia, was to sell oil and gas
to the fastest-growing energy market in the world, China. But on June 22,
when the state-controlled China National Offshore Oil Corporation, or Cnooc,
countered with a higher bid for Unocal, Chevron found itself in a delicate
Since then, Chevron's managers have gone into overdrive to portray the
Chinese government-backed offer as unfair competition and to close their
deal as quickly as possible. They have received support from many lawmakers
in Washington, who have painted the Chinese offer as a threat to America's
Now, Chevron must walk a fine line between fending off Cnooc's $18.5 billion
bid for Unocal and the risk of alienating Cnooc, its largest partner in
China. There, for example, the two companies have teamed up in a $35 billion
agreement to ship liquefied natural gas over the next 25 years from several
huge Australian fields where Chevron has part ownership to some of Cnooc's
terminals in China. But now, the partners appear to be on a collision
Much is at stake for Chevron and its cautious chief executive, David J.
O'Reilly. Since 2000, Chevron's oil production has declined every year, and
the company has had trouble replacing the reserves it pumps out of the
ground. On Wall Street, its share price trails its peers.
With a Unocal deal, Chevron, the second-largest American oil company after
Exxon Mobil, hopes to reverse both trends. Mr. O'Reilly estimates the
takeover would increase Chevron's proven reserves by 15 percent, to 13
billion barrels of oil equivalent, and expand its oil and gas production to
3 million barrels a day, up from about 2.5 million barrels a day in 2004.
Chevron has said that it expected the merged company to grow by 6 percent a
year from 2005 to 2009.
"Chevron wants it badly because they don't have near-term production
growth," said Jay Saunders, an oil analyst at Deutsche Bank. "The fact they
had to do this offer is a reflection of Chevron's challenges that its rivals
Chevron and Cnooc are now locked in a race against time - and a potentially
costly bidding war - before Unocal shareholders vote on the Chevron offer on
Since April 4, when its offer was formally endorsed by Unocal's board,
Chevron has managed to secure the approval of both the Federal Trade
Commission and the Securities and Exchange Commission in a record time.
Cnooc faces an additional level of scrutiny on national security grounds by
the Treasury Department's Committee on Foreign Investments in the United
States, and last week it asked the government for a fast review of its
While Chevron believes it still has the upper hand, its deal is far from
assured. Cnooc is negotiating with Unocal on the terms of its offer in a bid
to persuade the Unocal board to change its position and reverse its stance
that favors Chevron.
In the days after Cnooc topped their bid, Chevron officials have used harsh
language to describe their longtime partner.
Peter J. Robertson, Chevron's vice chairman, said Cnooc's bid was inferior
and would not produce as much oil and gas because Cnooc lacked experience in
Mr. Robertson has also taken a stab at the Chinese government by saying that
the bidding war with Cnooc was unfair because it was largely backed by loans
from the largest state-controlled bank and Cnooc's government-controlled
parent company. The loans are worth about $13 billion.
"Clearly, this is not a commercial competition," he said two days after the
Chinese offer was made. "We are competing with the Chinese government, and I
think that is wrong."
But he also dismissed suggestions that the battle would have any long-term
effects on Chevron's relations with Cnooc. "We are partners with Cnooc, and
we expect that to continue," he said in an interview last week.
For years, Chevron officials have become increasingly cozy with the Chinese
government, praising its efforts and trumpeting its alliances with Cnooc.
Mr. Robertson, in a speech in Beijing last October, said that China needed
to ensure a stable and secure supply of affordable energy and that China
would have to invest large amounts of its own capital in energy projects,
both within China and around the world.
Now, analysts said Chevron's new hardball strategy could backfire.
Chevron "developed a very good relationship with both the government and the
state-owned companies," said Han Xiaoping, the chief information officer at
Falcon Power, an energy consulting firm in Beijing. "I think this is a
strategic mistake that Chevron has made. It should have kept the whole deal
as a normal commercial activity and shouldn't have used politics as an
The battle is turning into a test for Mr. O'Reilly, Chevron's Dublin-born
chairman and chief executive since 2000, and his biggest challenge since he
successfully marshaled the $45.8 billion takeover of Texaco in 2001. That
acquisition came amid a wave of megamergers in the oil industry, after BP's
takeovers of both Amoco and the Atlantic Richfield Company and Exxon's
purchase of Mobil.
"Dave was a very active rugby player when he was a kid. He's very
competitive, but he's also very disciplined," said J. Robinson West, a
friend of Mr. O'Reilly and the chairman of PFC Energy, an oil consultancy
that counts both Chevron and Unocal as clients. "He doesn't want to lose the
deal but he doesn't want to do anything silly, like overbidding."
Before securing the assent of Unocal's board, Mr. O'Reilly has had to
increase his bid twice already. Some analysts expect he will be forced to
raise his offer once more, even if marginally, to clinch the deal.
Talks between the two companies started on Jan. 6 when Mr. O'Reilly called
Charles R. Williamson, his counterpart at Unocal, to ask if he would
consider a friendly takeover offer.
The call came hours after the first news reports that China's third-largest
government-controlled oil company was set to bid $13 billion for Unocal's
Asian assets. The bid was a bombshell in the oil industry that highlighted
the emergence of China as a powerful competitor in the global race for oil
and gas reserves.
For Chevron, though, it was a chance to act. With Unocal on the market,
Chevron could strengthen its reach in Asia, reverse its production decline
and increase its reserves - all in one quick shot.
"It's a tremendous opportunity for us," Mr. Robertson said. "The company has
slimmed itself down recently and focused on four or five world-class assets
from which a super-major like Chevron can get the most."
The company has had to fight for Unocal. According to regulatory filings
Chevron made to the S.E.C. in June, three companies have been quietly
competing over Unocal for more than six months.
After Cnooc's initial opening to Unocal in December, and Chevron's talks
with Unocal the next month, a third company, Eni of Italy, also approached
Unocal. During the next four months, Unocal's board rejected four offers,
two from Chevron, one from Cnooc and one from Eni, all deemed too low,
before finally endorsing Chevron.
On Feb. 28, after Unocal's board turned down his first offer, Mr. O'Reilly
dropped out of the race. He had offered 0.94 of a Chevron share in exchange
for each Unocal share.
But on March 28, two days before another board meeting at Unocal, Mr.
Williamson contacted Mr. O'Reilly to tell him his board would welcome a new
proposal from Chevron if it was still interested. Mr. O'Reilly put his team
to work again, and Chevron made a new offer of 1.03 of its shares for each
Meanwhile, Eni tentatively offered $58 a share in cash for each Unocal share
but never came up with a written proposal. It finally dropped out of the
race because some of its executives considered an acquisition too hazardous
and the price too high.
As for Cnooc, whose first offer of $59 to $62 a share had been turned down
informally earlier in March, its chief executive, Fu Chengyu, decided he
needed more time to consider a higher offer and withdrew from the bidding -
only temporarily, as it turned out.
At Chevron, according to the S.E.C. filings, Mr. O'Reilly was told by his
negotiating team that Unocal would "look at his offer more favorably" if it
included some cash. So on April 2, just hours before the deadline, Chevron's
board met to approve an offer that included both cash and shares.
The next morning, executives from the two companies convened to consider
Chevron's new proposal: 0.7725 of a Chevron share and $16.25 in cash for
each Unocal share. Talks then lasted all day and extended into the night
before Unocal's board finally approved the new offer. A merger agreement was
signed at 4:30 a.m. Pacific time on April 4. Hours later, the two executives
announced the deal. Since then, the value of Chevron's offer has dropped by
$400 million because of a 4 percent decline in Chevron's share price.
Jad Mouawad reported from New York for this article and David Barboza from