Unocal bid as much about politics as oil

BEIJING (Reuters) - The bid by Chinese state-run oil firm CNOOC to buy U.S. producer Unocal reflects its vast appetite for resources, but analysts say the deal is as much about China's military security and domestic control as it is about energy.

It is no accident that what would be the biggest-ever overseas acquisition by a Chinese firm is in the energy sector, with China's diplomacy increasingly linked to its need for resources to feed an economy growing at rates of nearly 10 percent a year.

"This is not just any old bid for a company. It's something to do with a growing great power and the renaissance of China," said Alexander Neill, who heads the Asia Programme at Britain's Royal United Services Institute for Defense and Security Studies.

China says CNOOC Ltd.'s $18.5 billion offer for Unocal Corp. is strictly business.

"The relevant people should not make a fuss and should not interfere in this kind of business cooperation based on political reasons," Foreign Ministry spokesman Liu Jianchao told a news conference.

But analysts say the bid is based on political and military calculus as much as economic.

"It's a strategic decision, there is no doubt about it," said Wenran Jiang, a scholar at the University of Alberta who follows China's energy sector. "There is absolutely no question this deal had to go through the highest level approval," he said.

That's because with companies across China suffering brown-outs due to power shortages, energy is key to economic growth, which in turn is seen as crucial for China's communist leaders to maintain social stability and their grip on power.

Indeed, a rare violent riot in the northern town of Shengyou this month was sparked by a property dispute over land for a state-owned power plant.

SECURITY FEARS

Some American politicians are already opposing the offer by the state-owned company in a strategic sector, calling it a threat to U.S. national security.

But Beijing fears the opposite -- the threat to its own security in the face of what it sees as a U.S. strategy to ally with Japan to contain China, a worry exacerbated in February, when Washington and Tokyo cited Taiwan as a strategic priority.

"For China, securing enough energy resources is a question of national security," said Neill.

The question of energy resources also cuts to the heart of Beijing's top security issue, its goal of reuniting with Taiwan, the self-governed island China has vowed must return to mainland control, by force if necessary.

China passed a law in March allowing for use of force should Taiwan move toward formal independence, but with the U.S. obligated to help defend the island, analysts say Beijing also fears being cut off from oil supplies should it attack.

If the Unocal deal goes through, it would double CNOOC's oil and gas output and increase its reserves by nearly 80 percent, although Unocal's supplies would not necessarily be accessible if a conflict cut off sea lanes.

From an economic perspective, analysts say there is no reason CNOOC's cash offer should not go through.

"The only way the (U.S.) government should get involved is if it somehow threatens national security, if it's a company that makes defense electronics. If not, stay out of it -- it's a global economy," said Hersh Cohen, chief investment officer at Citigroup Asset Management.

But if the deal is rejected, relations between Beijing and Washington would likely sour, with the two already sparring over China's surging textile exports and its yuan currency, which Washington says is pegged artificially low, giving its exporters an unfair advantage.

"It would be seen by the Chinese side as confirmation that the U.S. is trying to contain China, not just militarily, but economically," Jiang said.

There is speculation a rejection of the deal would also drive China into the arms of oil producers like Sudan and Iran, though analysts point out Beijing is courting those countries regardless.

(Additional reporting by John Ruwitch and Mark McSherry in New York)