The Tug of War: Realism and Liberalism in CNOOCs Bid for

Unocal
Tsung-yen Chen
MA Student, East Asian Studies
Stanford University

Center for East Asian Studies

Stanford University
100 Encina Commons
615 Crothers Way
Stanford, CA 94305-6006
tzeng69@stanford.edu

Introduction

Since the late 1970s, China has begun a period of high economic growth and
experienced the increasing demand for energy. Energy is a critical resource for supporting
China's economic development that can be seen as the blood vessel of economic
development. With surging oil demand, China, in the near future, will consume the most
volume of petroleum. The domestic oil production in China, since 1993, hasnt been able to
sustain domestic demand. In order to deal with the foreseeable oil shortage problem in the
near future, Chinese government in the late 90s has restructured the three biggest national
oil companies1 (NOCs) and actively encouraged them to seek overseas investment, such as
proposing initial public offering (IPO) in Hong Kong, investing funds in constructing
infrastructures in developing countries with abundant resources, cooperating with foreign
governments to explore and excavate in new areas with energy reserves, or merging foreign
oil companies. Chinas expanding strategy of energy policy has alarmed other countries
that Chinas quest around the world will endanger the energy security around the world.
U.S. government is sensitively concerned about Chinas overseas investment on the
energy industry, being anxious that Chinas expansion will eventually harm the national
interest and energy security. Some borrow the concept of realism of international relation
theory to explain Chinas overseas economic behaviors!, understanding such actions as the
zero-sum game that Chinas gain will be Americas loss. Beijing might use oil as a weapon
1

The three major oil companies mentioned here are China National Petroleum Corporation (CNPC), China
Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC).
After restructuring in 1998, CNPC controls most assets of energy industry in the north and west of the contry;
Sinopec controls assets in the south and east; CNOOC controls off-shore assets.
2
Chinas energy-related actions reflect its distrust of international oil markets quoted in 2007 Report to
Congress of the U.S.-China Economic and Security Review Commission, U.S.-China Economic and Security
Review Commission, November, 2007, p.175.

trying to influence the world. In addition to hawkish realism, some people introduce the
idea of liberalism trying to explain Chinas behavior from a different angle. They see
Chinas funds as benefits to help developing countries explore their energy reserves. As a
consequence, there will be more sufficient energy supply in the international market and
this will, in fact, strengthen U.S. and the world energy security. Besides, Chinas entering
international market will potentially encourage the democratization in China". This, in the
long run, will accord with U.S. national interest.
In the mid 2005, these two divergent views underwent a great debate while China
National Offshore Oil Corporation Ltd. (CNOOC) was trying to merge Union Oil Company
of California (Unocal), based in California. Receiving a huge amount of low interest loan
from its parent company, which was controlled by the Chinese government for holding
more than 70% of shares, CNOOC tried to outbid Chevron by 1.4 billion dollars4. To the
realist, if CNOOC, controlled by the government, would infringe U.S. national interest,
especially when China was seen by the Bush administration as a strategic competitor#. If
U.S. clashed with China in the future, selling an oil companies to China would reduce
energy sources, hence harming U.S. energy security. However, the liberalism thought U.S.
government shouldnt meddle in this deal. They argued that only 10% of Chinas foreign
oil sources went back to China, the rest of them went directly into international market$.
With more oil in the market, it is less likely to see international conflicts on oil resources.

Aaron L. Friedberg. The Future of U.S. China Relations: Is Conflict Inevitable? International Security,
Vol. 30, No. 2 (Fall, 2005), p. 15.
4
In this merge case, CNOOC, compared with the 17.1 billions in cash and stocks offered by Chevron, offer
18.5 billions in cash to buy the UNOCAL.
5
Remarks by the President at American Society of Newspaper in the J.W. Marriott Hotel, Office of the
Press Secretary, April 5, 2001. http://www.whitehouse.gov/news/releases/2001/04/20010405-5.html
6
David G. Victor, What Resource Wars? National Interest, Nov/Dec 2007, p.48.

Therefore, the liberal encouraged Chinese oil companies to participate in overseas oil
investments.

In this paper, I endeavor to adopt two divergent views of international relation,

realism and liberalism, to discuss the dynamic of the policy outcome behind CNOONs
failed attempt to merge UNOCAL and why U.S. government in the end tried hard to block
CNOOCs offer that was more profitable to shareholders of Unocal7. First, I discuss
Chinas foreseeable energy shortage problem and its quest for oil overseas. I also focus on
the relation between oil companies and government. The reality discussed in this section
was the foundation to understand the policy outcome in this case. Secondly, I lay out three
most important demand sides for the policy. They include Chevron, CNOOC and the blue
team (a loose coalition supporting hard-line policies toward China). All of them exerted
pressures in order to influence the policy. In the third part, I introduce the supply sides of
policy in this case, which consist of the US Congress and White House, analyzing their
attitude toward this case. Fourthly, I use realism and liberalism to explicate the framework
and content of American policy toward China in this case and, furthermore, to analyze how
these two concepts influence the policy outcome. Finally, I argue that both views are
helpful for us to understand the policy making. However, if we incorporate ideas stressed
by the constructivist theory, we will be more accurate to assess Chinas overseas expanding
behaviors.

Fu, Chengyu, the chairman and CEO of CNOOC Ltd., asserted in his article that CNOOC would be good for
Unocal's shareholders for its profit-seeking principle. See Fu, Chengyu. Why Is America Worried? Wall
Street Journal, July 6, 2005.

Energy Profile of China

In order to understand why CNOOCs attempt failed, we need to first understand

the current energy profile of China, which serve to be the foundation of perspectives from
each contending side. This will help us realize the opinion inputs the government received,
therefore understanding the dynamic of policy making in this case. In this section, I
illustrate the situation of surging demand for oil in China, Chinas overseas ambition for
securing oil sources and the relation between national oil companies and the central
government.

Chinas Surging Demand for Oil

After discovering the Daqing oil field of Heilongjiang Province and Shengli oil
field of Shangdong Province in the 60s, China remarkably increased her oil production.
Outsiders were optimistic about China being a major oil exporter in the near future. In 1973,
China, as expected, started to generate oil surplus for export. Scholars, at that time, were
arguing about how China would leverage the international politics by her oil weapon. In
addition, the extremely lucrative oil revenue, caused by the high oil price during the oil
crisis, would mend her situation of high trade deficit with major countries in the world8. In
those experts eyes, China would become a major oil power.

Park, Choon-ho and Jerome Alan Cohen. The Politics of Chinas Oil Weapon, Foreign Policy, No.20
(Autumn, 1975), pp. 28-49.

Figure 1. Chinas annual net oil import from 1980 to (Sources: BP Statistical Review of World
Energy June 2007)

While China started to experience phenomenal economic development in the late

1970s, the consumption on oil increased dramatically. The growth of oil production,
therefore, couldnt keep up with the economic development (see figure 1). While the
growth of oil production has grown 38 percent from 1978 to 1993, the gross domestic
production (GDP) has grown around 250 percent%. Just twenty years later, China could no
longer fulfill the oil consumption by its domestic production. In 1993, the first time after
the economic reform, Chinas domestic oil demand surpassed production, which meant that
China became a net oil-importing country, from importing 56 thousands barrels per day
(bpd) to 3.4 millions in 2006 bpd from abroad&'. In 2003, China became the worlds second

data and figure needed

The data is from China Energy Profile in the Energy Information Administration.
http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=CH
10

largest consumer of oil behind the United States. A year later it was the number three
importer of oil after the United States and Japan&&. Between 2000 and 2005, China was
responsible for about one quarter of the growth in world oil demand&!. It is projected,
however, that the oil import will account for 57% of total oil consumption in China in 2010,
and 74% in 2025&". In the near future, China will depend on oil import desperately and such
anxiety to securing sufficient oil has been driving Chinas quest for overseas expansion.

Chinas Quest for Oil Overseas

Facing the surging demand for oil, government can design policy incentives to
influence the way people consume energy, that is, to emphasize on the demand side of
policy, which may encourage people to use energy in more efficient ways. This will save
energy and decrease the degree of energy dependence. In addition, government can also
increase the energy supply, such as exploring domestic oil reserves or securing oil sources
abroad in an attempt to satisfy surging domestic demand. At the turn of the century, there
were debates inside the Chinas policymaking circle of which strategies should China adopt
to manage the energy problem. They proposed that, in order to protect Chinas energy
security, they should initiate government-dominated policies and focus on securing oil
supply. There are three main concepts, which included Overseas Investment,
Transitional Oil Pipelines and Oil Diplomacy&(. According to these ideas, Beijing and

11

The data can be found in Energy Information Administration. http://tonto.eia.doe.gov/country/index.cfm

Erica Downs, Energy Security Series: China, The Brookings Foreign Policy Studies, The Brooking
Institution, Dec. 2006, p. 1.
13
Lee, Pak K. Chinas Quest for Oil Security: Oil (Wars) in the Pipeline? The Pacific Review, Vol. 18, No.
2 (June, 2005), p. 268.
14
Erica Downs. The Chinese Energy Security Debate, The China Quarterly, Vol. 177 (2004), pp. 32-39.
12

oil companies actively went abroad to invest in overseas oil industries, hoping to abate the
interference coming from the energy supply side.
In overseas investment, China, since 1992, has begun actively investing in natural
resources and infrastructures in many developing countries&#. Among them, the most
controversial cases that worried the Bush administration the most were projects in Sudan,
Venezuela and Iran. China National Petroleum Corporation (CNPC) has invested in Sudan
since 1996 after western oil companies left due to civil wars and terrorism. The void was
then filled by funds, totaling 4 billion dollars, from China. These projects focused on
exploring and excavating oil reserves and infrastructures. In addition, Chinese government
also helped Sudanese government develop the military industry, exporting armament to
Sudan. China thus became the biggest investing country to Sudan around the world&$.
However, this also alerted the world that Chinas funds in Sudan might exacerbate the
unrests and human right conditions. In Latin America, Chinas investment in Venezuela
aroused great concern in the U.S. government. Hugo Chavez, the president of Venezuela,
maintained friendly relationship with communist regime in China. He welcomed China to
go Venezuela for exploring new energy reserves&). Chavez, in September 2006, invited
China with high profile and promised for increasing oil export to China from 155,000
barrels per day (bpd) to 500,000 bpd in 2009, and 1 million bpd in 2012&*. In the Middle
East, China has started to invest in Iran since mid 1990s. In October 2004, China Petroleum
& Chemical Corporation (Sinopec) signed a 100 billion deal with Iranian government,
15

Ibid., p. 34.
Anthony Lake and Christine Whitman. More Than Humanitarianism: A Strategic U.S. Approach Toward
Africa, Council on Foreign Relations, 2006, pp. 43.
17
Stephen Johnson. Backgrounder: Balancing Chinas Growing Influence in Latin America, The Heritage
Foundation, October. 24, 2005, pp.3.
18
John Chan. Chinas oil diplomacy: Hugo Chavez makes high profile visit to Beijing, New York Times,
September 6, 2006.
16

allowing China to import a further 250 million tons of LNG from Iran's Yadavaran oilfield
and providing China with 150,000 barrels per day of crude oil over a 25-year period&%. Most
of the time, China adopted similar strategies in order to secure equity oil!', which can
guarantee China to obtain enough overseas oil to feed domestic demand.
Investing in transitional oil pipelines, China expected to build pipeline to connect
oil production sites in Central Asia and Russia with Chinas refineries. Because China
doesnt possess a strong navy force to protect the nautical transportation for oil tankers,
importing oil through pipeline will prevent harassment from U.S. navy or pirates. In
addition, if other countries intend to harm Chinas energy delivery, they have to attack
pipeline in Chinese soil or the third country. This will cause serious international conflict
and increase tremendous cost for belligerent states, therefore abating their intention for
attacking pipeline!&. In this sense, China has sought actively to invest in pipeline
construction to evade the future interference from international arena!!. In the process,
China faced serious contention from Japan in pipeline construction that traverses Central
Asia. Japan saw Chinas surging oil demand as a threat and consequently struck a
cooperation agreement with four Central Asian nations Kazakhstan, Kyrgyzstan,
Uzbekistan and Tajikistan, using economic aid in exchange for energy supply!". Beside,
China and Japan respectively back the Angarsk-Daqing and Angarsk-Nakhodka pipeline
routes24, seeking cooperation with Russia to benefit from the geopolitical advantage!#.

19

Jephraim Gundzik, The ties that bind: China, Russia, and Iran, Asia Times, June 4, 2005,
http://www.atimes.com/atimes/China/GF04Ad07.html
20
Erica Downs. The Chinese Energy Security Debate, The China Quarterly, Vol. 177 (2004), p. 35.
21
Ibid., p. 37.
22
Pak K. Lee. Chinas quest for oil security: oil (wars) in the pipeline? The Pacific Review, Vol. 18, No. 2,
pp. 265-301.
23
Ibid., 283
24
Ibid.

Because securing enough oil became a critical issue in China, maintaining reliable
oil sources, thus, became a force to drive Chinas foreign policy since then. In order to
strengthen energy cooperation with other states, Beijing has exerted much resource in
carrying out intensive oil diplomacy to facilitate oil companies overseas investment.
Beijing has actively promoted the Shanghai Cooperation Organization, hoping to develop a
secure, stable, and peaceful regional framework with countries from central Asia!$. Besides,
Chinese government held the Beijing Summit of the China-Africa Cooperation Forum in
November, 2006, inviting African leaders to the capital and reached an agreement of
developing a new type of strategic partnership, featuring political equality, mutual trust,
mutually beneficial economic cooperation and cultural exchanges. President Hu Jintaos
visit to Africa, his third times since ascension, was seen as the means to protect Chinas oil
interest in Africa. Many believed that the motivation behind the ambition of building
partnership with those regions was to sustain the energy security and diversify the sources
of oil import.

The Ambiguous Relation Between Oil Companies and Chinese Government

Understanding the relation between Chinese oil companies and government can
help us realize the dynamic behind overseas investments. Chinese oil companies were
always criticized for its intimate relation with Chinese government. And Chinese
Government was accused of exerting great control on them. As mentioned above, states

25

Richard Giragosian. The Sino-Japanese pipeline struggle, Asia Times, Oct. 18, 2005.
http://www.atimes.com/atimes/China_Business/GJ18Cb02.html
26
Yuan, Jing-Dong. China and the Shanghai Cooperation Organization, Polotologiske Studier, Vol. 6, No.
2 (September, 2003), pp. 128-139.

that Chinese oil companies aimed at are always the targets that the Bush administration
condemns, blaming China to be the accomplice that endangers U.S. national interest and
universal value!). NOCs expansive intention is seen as the extension of Beijings will for it
control dominant shares of NOCs. However, some argued that behaviors of Chinese oil
companies were not driven by politics. They argued that since 1990s after corporate reform,
maximizing profit has dominated Chinese NOCs thoughts!*. They considered the overseas
expansion of Chinas NOCs was not driven from the top-down but rather from the
bottom-up. The government transferred the resources and power to the NOCs and
overseas expansion was decided by the leaders of NOCs and the government often just
acted as subsidiary!%. The divergent views of such relation are critical of how to observe the
implication of NOCs overseas expansion.
In the initial stage, international oil companies (IOCs) dominated the world oil
industry. For governments of oil-producing countries unfamiliar with the industry, adding
that it was hard to know how lucrative the profit that IOCs obtained, the problem of
information asymmetry thus emerged between IOCs and oil-producing countries. While oil
price surged during the oil crisis, as a consequence, oil-producing countries expecteded to
establish NOCs to control the benefit coming from natural resources30, rather than being
deceived by IOCs. In the past decades, to IOCs, the price paid for entering the other states
energy industries has been increasing because each countrys NOCs and government,
especially in the developing world, tightly control oil reserves in order to restrain

27

Dexter Roberts. The Squeeze on PetroChina, Business Week, Feb 28, 2008.
http://www.businessweek.com/magazine/content/08_10/b4074028093921.htm
28
Fu, Chengyu. Why Is America Worried? Wall Street Journal, July 6, 2005.
29
Erica Downs. Chinas Quest for Overseas Oil, Far Eastern Economic Review, Sep., 2007, p. 53.
30
Dag Harald Claes. Globalization and State Oil Companies: The Case of Statoil, The Journal of Energy
and Development, Vol. 29, No. 1, p. 44.

investment from abroad. China in the late 90s, a period that oil price dropped, has started to
restructure NOCs, dividing oil industry to three major NOCs"&. Beijing understood that, in
order to sustain domestic demand, they need NOCs to go abroad seeking for more oil
supply. They hope to increase the degree of NOCs autonomy and managerial power for the
sake of improving their global competitiveness. Though government still held the dominant
shares of NOCs, it encourage NOCs to raise funds in foreign capital markets by initial
public offering (IPO)32 that was learnt from the advanced idea of corporate governance in
the western society. As oil price hovering around 100 dollars per barrel recently, we can
predict that Beijing will have more incentives to control NOCs once the equity oil overseas
starts to earn a huge amount of oil revenue. In this sense, we might foresee that China will
exert more control on NOCs.
According to Erica Downss analysis, the most important stakeholders in the
making of Chinese energy policy are NOCs, State Development Planning Commission
(SDPC), State Economic and Trade Commission (SETC), the Ministry of Foreign Affairs
(MFA), the military and the think tanks"". Among them, due to lucrative revenue and the
closed relation with top elites, NOCs could exert great influence on the energy policy.
However, the power of decision-making was held in the hands of SDPC and SETC.
Leaders of NOCs were appointed by the government"(, and they also served as Secretaries

31

See footnote 1.
China National Offshore Oil Company Ltd (CNOOC) kick off its US$1.1-US$1.4 billion overseas listing
campaign by opening 5 per cent of its IPO to retail investors in Hong Kong in 2001.
33
Downs, 2004, pp. 25-28.
34
fu cheng yu bei ren ming wei zhong guo hai you zong jing li dang zu shu ji (fu cheng yu is appointed as
the CEO and Party secretary of CNOOC),CNOOC Briefing Office, October 16, 2003.
http://winwin.redcome.com/servlet/Report?node=12040&language=1
32

of Party Committee"#. They helped government monitor the NOCs direction, making sure
they wouldnt contradict the communist ideology. Because the government was unfamiliar
with oil industry, it tended to appoint experts of oil industry to lead the NOCs. It seemed
that Beijing respected the professions, willing to let professionals make the decision and
reducing governmental control. Most of these experts, however, treated their posts as the
channels to enter the central leading group in Beijing. Consequently, if Beijing asked NOCs
to follow its policy, it would be hard for these professional leaders in NOCs to disregard the
pressure from the top. NOCs had to leverage between political and economic issues rather
than making decisions purely based on economic consideration"$. Though Chinese NOCs
asserted that politics was not their consideration, they couldnt get rid of the reality that
government was the biggest shareholder and the intimate relation between them. In such
structure, we can argue that if government tries to control NOCs corporate policy in the
future, they are too weak to escape from the influence of Beijing, especially when leaders
of NOCs will risk of being replaced and failing to enter central elite group if they disobey
instructions from the top.

Policy Demand Side

After realizing Chinas surging demand for oil and how it response to this concern,
then we can analyze the demand side of policy in the CNOOCs case based on the energy

35

According to CNOOCs Chinese website, there are seven party secretaries being appointed as top leaders
and one member of the Chinese People's Political Consultative Conference. In the English version website,
however, there is no information regarding to their political affiliation.
http://www.cnooc.com.cn/zhyww/gsjj/ldml/ldcy/default.shtml
36
Daniel H. Rosen and Trevor Houser. China Energy: A Guide for the Perplexed, China Balance Sheet,
Peterson Institute for International Economics, May 2007, p. 19.

profile of China. I consider that there are three most important actors in this case, which
includes two rival oil companies, Chevron and CNOOC, and the blue team that exerted
great influence in political arena of Washington. These group, based on the current Chinas
behavior discussed above, hope government to output policies that benefited them or to fit
into their views about China.

Rival Competitors: Chevron and CNOOC

Chevron was the biggest rival competitor standing in CNOOCs attempt to acquire
Unocal. Both of them put in a large portion of resources to hire top lobby firms to affect
Washingtons policy outcome in favor of their intention respectively to merge Unocal. To
Chevron, they preferred Washington could meddle in the deal to block CNOOC from
entering the market. CNOOC, in the other hand, hoped government could stay out of this
deal, letting market mechanism to make the final decision, the idea that was literally
embraced by the U.S. government. If there is no government intervention, CNOOC
believed that the board of Unocal would accept CNOOCs offer for financially being more
lucrative to their shareholders.
From the Chevron side, they successfully adopted the idea of Chinas threat of
becoming a rising power, the idea that evoked protectionism37 in Washington. They hired
Federalist Group as their lobbyists, based in Washington, to input Chinas negative image
to policy circle in Washington. The principal of Federalist Group, Wayne Berman, was an
official from Commerce Department in the first Bush administration and also a big fund-

37

Francis Schortgen. Protectionist Capitalists vs. Capitalist Communists: CNOOCs Filed Unocal Bid in
Perspective, USF Center for the Pacific Rim, Sep. 2006, pp. 2-10.

raiser for President Bush. Another member Chevron hired in Federalist Group, Drew
Maloney, was a former top aide to Texas Republican Rep. Tom DeLay, then the House
majority leader. He tried to carry Chevrons case forward into the US Congress, pressuring
Congress to take actions38 for blocking CNOOCs offer. CNOOC, in the other hand, hired
law firm Akin Gump Strauss Hauer & Feld to lobby for their intention. Among those
lawyers, Partners Alan D. Feld and James C. Langdon Jr. were major fund-raisers for Bush
administration, and the consultant, Bill Paxon, was once Republican representative from
New York, thus owned connections in the Congress. In addition, CNOOC attempted to
reverse the negative image to China in Washington by incorporating media strategy.
CNOOC hired Public Strategies corp. to do the job, The vice chairman then, Mark
McKinnon, was the director of President Bushs media campaign in the 2000 and 2004
elections39.
Both Chevron and CNOOC in 2005 threw in huge amount of money hiring lobby
firms and media companies. According to the statistics from opersecret.org40, Chevron in
2005 spent around 9 million 490 thousands dollars in lobby firms (only less than 2 million
in 2000). CNOOC spent 2 million 220 thousand dollars for their first time in 2005 in
lobbying and public relations (see figure 2). Having been building public relations with the
government for a long time, Chevron, compared with CNOOCs inexperience, excelled
CNOOC in influencing governments behaviors. Besides, the coming Chinas threat

38

Russell Gold and Greg Hitt. Chevron Labors to Derail, The Wall Street Journal, June 30, 2005.
Steve Lohr. The Big Tug of War Over Unocal, New York Times, July 6, 2005.
40
Opensecrets.org is founded by the Center for Responsive Politics, which is a non-partisan, non-profit
research group based in Washington, D.C. that tracks money in politics, and its effect on elections and public
policy. We can track how much money each corp. spend in lobby firms.
http://www.opensecrets.org/lobbyists/index.asp
39

depicted by Chevron41 corresponded better to the attitude from Washington, which I will
discuss later.

Figure 2. Annual lobbying spending comparison between Chevron and CNOOC. (Sources:
Lobbying Database, The Center for Responsive Politics, see footnote 38.)

Blue Team

Blue Team is a loose alliances of members of Congress, congressional staff, think

tank fellows, Republican political operatives, conservative journalists, lobbyists for Taiwan,
former intelligence officers and a handful of academics, all united in the view that a rising
China poses great risks to America's vital interests(!. They have successfully applied their
influence in the Congress to attach riders to legislation in Congress to affect U.S. foreign
policy toward China.

41

Jonathan Weisman. In Washington, Chevron Works to Scuttle Chinese Bid, Washington Post, July 16,
2005, Page D01.
42
Robert G. Kaiser and Steven Mufson. Blue Team Draw a Hard Line on Beijing, Washington Post, Feb.
22, 2000, Page A01.

The US-China Security Review Commission in the Congress was an ideal place for
them to disseminate their critical perspectives toward Chinas growing power. Though the
commission was bipartisan, which consisted of six republicans and six democrats, the
experts and consultants they hired were deeply affected by the ideology from the blue
team(". Their 2002 annual report of US-China Security Review Commission, commissioned
by the Congress, believed that the United States is a superpower in decline. The Chinese
communists believe that America is their long term competitor for regional and global
military and economic influence.(( In report of 2006, they signaled the alarm for Chinas
overseas investment in energy sector, considering that, due to the disbelieving in free world
energy market, Chinese government treated state ownership of energy assets as more secure
than reliance on the world market for trade oil. And such idea was in conflict with U.S.
national interest, which considers the preservation of energy security relies on liberal
energy market. They concluded that CNOOCs intention to merge Unocal was to control
overseas energy source, rather than selling energy into the world market45, therefore seeing
this merger case, if succeed, will threaten U.S. energy security.
In addition, many figures from the blue team during the period of intensive debates
in the mid 2005, came out to criticize Chinas expansive behavior, urging that government
should intervene to block CNOOCs offer. The current Speaker of the U.S. House of
Representatives Nancy Pelosi, then House Democratic Leader, in 2005 called CNOOC bid
to acquire Unocal a graphic example of America's energy vulnerability.46 Another

43

Greg Rushford. In Search of an Enemy, The Rushford Report, August, 2002.

http://www.rushfordreport.com/2002/8_2002_Yankee_trader.htm
44
Report to Congress of the U.S. China Security Review Commission, 2002 Annual Report, Chp.1.
45
Report to Congress of the U.S. China Security Review Commission, 2006 Annual Report, pp.96.
46
U.S. Opens China Energy Office as Chinese State Oil Bids for Unocal, Environment News Service,
Washington, DC, July 1, 2005. http://www.ens-newswire.com/ens/jul2005/2005-07-01-03.asp

important figure in the blue team Frank J. Gaffney Jr., the president of the Center for
Security Policy in Washington, published several comments in mid 2005 to blame this deal,
arguing that it will almost certainly require government action to prevent Beijing from
once again having its way with sensitive American assets and national-security equities.47
Overall, blue team expected the Bush administration to constrain Chinas oil diplomacy to
secure American national security. Their perspectives of policy demand accorded with
Chevrons, together, as a consequence, they successfully guided the policy from
Washington to their favor.

Policy Supply Side

After understanding the demand side in this case, I then discuss the supply side of
policy, which I consider the US Congress and White House to be the most critical actors.
While Congress overwhelmingly passed several bills to obstruct CNOOCs offer, White
House decided to remain silent. We can apply Mancur Olsons theory of collective action
to understand their divergent attitudes.

Congress with High Profile

In Congress, CNOOCs offer brought about great concerns. They, on the one hand,
disseminated the implication of this case to the society, attempting to generate public
awareness and observe the public opinion. On the other hand, they sent letters to the

47

Frank J. Gaffney Jr. Chinas Charge, National Review Online, June 28, 2005.
http://www.nationalreview.com/gaffney/gaffney200506280909.asp

Secretary of Treasury (as chair of Committee on Foreign Investment in the United States CFIUS) to pressure the White House and also intended to block the deal through legislative
bills48. Congress, as early as in 1988, has already initiated the Exon-Florio provision of the
Defense Production Act (Exon-Florio provision). This provision aimed at setting a barrier
to buffer the growing trend of foreign companies acquisition of U.S. companies,
delegating the President of the United States the power to rule against the foreign mergers
that would potentially harm national interest49. The agency delegated to conduct
investigations is CFIUS, which is housed in the Department of the Treasury. The content of
the provision emphasizes on securing national interest, allowing CFIUS to conduct
investigation once it notice merger cases that will potentially threaten U.S. security and the
President should decide whether or not to deny the deal according to CFIUSs investigation.
Due to CFIUSs small size and not being transparent, however, CFIUS has only
investigated 25 cases from 1988 to 2005. Among those case, only 12 cases were send to the
President for decision. Some argued that without intervention from Congress, the chance
that CNOOCs offer be inquired by CFIUS was very slim for CNOOCs intention wouldnt
be considered as a threat to U.S. national interest50.
Without any effective policy to obstruct CNOOCs offer, Congress, in 2005, started
to pass legislative bills to intervene. Several bills in the 109th Congress addressed their
concerns. H.Res. 344. (Pombo) expressed the concern that a Chinese state-owned energy
company exercising control of critical United States energy infrastructure and energy
production capacity could take action that would threaten to impair the national security of
48

Dick K. Nanto et al. China and the CNOOC Bid for Unocal: Issues for Congress, CRS Report for
Congress, September 15, 2005, p.14.
49
Ibid., p.11.
50
James A. Dorn. U.S. China Relations in the Wake of CNOOC, Policy Analysis, CATO Institute,
November 2, 2005, p. 5.

the United States. S. 1412. (Dorgan) prohibit the merger, acquisition, or takeover of
Unocal Corporation by CNOOC. In addition, the Energy Policy Act of 2005 was signed
into law on Aug. 5, 2005. Section 1837 requires a study by the Secretaries of Defense and
Homeland Security of the growing energy requirements of the PRC the studies would
include an assessment of the relationship between the Chinese government and energyrelated business located in China and delays CFIUS from sensitive international energy
mergers and making recommendations to the president.51 U.S. Representative Richard
Pombo, a Republican from the California district, where Chevron is located, claimed If we
hadn't put the amendment in the energy bill, they [CNOOC] might have succeeded.
According to this act, CNOOCs deal would be delayed at least 120 days52. Due to
the unforeseeable cost caused by this suspension, CNOOC decided to withdraw,
condemning the Congress to apply political means to obstruct CNOOCs offer, which was
driven purely by the economic consideration53.

White House with Low Profile

Although lobbyists hired by Chevron and CNOOC all maintained good relations
with the Bush administration and all hoped to influence the White House to act in their
favor, Washington chose to remain silence rather than hard-line actions in Congress. Some
argued that the silence of White House was a result of pressures coming from several
distinct directions, and the Bush administration didnt want to displease each of them.
51

CRS Report for Congress, p.15.

Cnooc Drops $18.5 Bln Unocal Bid Amid U.S. Opposition, Bloomberg, Aug. 2, 2005.
http://www.bloomberg.com/apps/news?pid=10000006&sid=ah3uSZmkLLBI&refer=home
53
Matt Pottinger et al. Oil Politics: Cnooc Drops Offer for Unocal, Exposing U.S.-Chinese Tensions, The
Wall Street Journal, August 03, 2005.
52

Therefore, the White House wanted to first wait for the CFIUSs investigation outcome,
then to make comments54. Besides, if this deal was badly handled, they feared to further
sour the already precarious relation with Beijing. Bush needed cooperation from China, at
that time, to cope with troubles of North Korea and terrorism. However, the U.S. China
relation is always trapped in intellectual property rights, the trade deficit, the currency
issue, human rights and Taiwan issues. If Bush came out to join Congresss bashing China,
it would definitely harm bilateral relation55.
Congress is a legislative organism for representatives of people to express opinions
from divergent angles and hopefully to form the consensus among different sides.
Comparing with administrative organism like the White House, there is much more room
for Congress to harshly opine on current affairs. In contrast, White House is an
administrative unit to execute regulations and enforce laws. It stands at the forefront,
representing a whole country to deal with domestic and foreign affairs. Whenever it makes
decision, a lots of parties will be affected and it will influences a countrys perception
instantaneously. Regarding to foreign policy, actions from White House will directly affect
foreign attitude toward America. In this sense, White House has been suffering more
intangible constrains than the Congress. From the perspective of interest groups, the
President possess enormous power, therefore all divergent parties will seek to influence his
decisions. They will exert influence as much as they can into the White House. It seems
that the president needs to endure more pressures and constrains than the Congress.
If one believed the assumption above, we can further argue that the White House is
less willing to express opinion in this case. In Mancur Olsons view of collective action, it

54
55

Interview with Elizabeth C. Economy. Q&A: China's Bid for Unocal, New York Times, July 6, 2005.
Ibid.

might be reasonable to see the Bush administration as lacking the strength (the poorer one
in Olsons sense) to opine on the CNOOCs offer. Therefore, it would rather become a free
rider on Congresss actions and remained silence. The ability of Congress to express
opinions, in contrast, was stronger (the richer one) and suffered less than the White House
from intangible pressures and constrains as mentioned above. In the CNOOCs case, we
can see the problem of collective action, which free-riding on Congresss tough stance
maximized the benefit of the White House. There is no identical stance toward this deal
between the legislative and administrative units. However, going along this way actually
help absorb the criticism from Beijing when Congress acted toughly toward China.
Furthermore, White House would have to risk any political impact coming from China.

Realism Overwhelms Liberalism

After realizing the demand and supply sides of policies in this case, I adopt realism
and liberalism coming from international relation theory to analyze divergent views toward
the implication behind CNOOCs offer, and furthermore to illustrate the reason why the
Congress in the end drew up several bills that impeded CNOOCs more lucrative deal.

Realist Perspective

According to Aaron Friedbergs analysis, ideas of U.S. China policy are divergent.
Among different perspectives, there are two most important ideas that dominate, which are

Realist Pessimists and Liberal Optimists 56. Both views fit into the concepts of realism and
liberalism respectively. In this case, we can sense that the debate on CNOOCs intention
was actually driven by these two different ways of how to observe and predict this case.
In this case, there are five main concepts from realism that are critical to support the
argument of obstructing CNOOCs deal from succeeding. First of all, the realist considers
that in the anarchic international system, recurrent struggles for power and survival are
inescapable. History is a vicious circle in the sense that without constraints from
supranational authority, each state will contend for seeking hegemonic status. Secondly,
when the power of a nation is rising, it will tend to be expansive in order to secure markets,
resources and transportation routes, and to protect its domestic security and development.
Thirdly, rising powers will seek to assert themselves and are often drawn to challenge
territorial boundaries and international institutional arrangements. Fourthly, when there is
conflict between dominant and rising powers, the former will tend to devastate the latter by
force in order to protect national interests57. Finally, realism emphasizes the importance of
relative gain, considering other nations gain as domestic loss. Cooperation becomes harder
and conflicts happen more easily due to each nation indispose other nations to gain.
When CNOOC, which secured low interest loan from parent company dominated
by Chinese government for controlling more than 70% shares,58 announced to contend for
the bid, realists in the Congress, think tanks and media gained momentum to blast Chinas
overseas expansion. Chevron also free-ride this trend to join this group. They argued that
United State and China have been colluding in several issues, such as Chinas expanding
56

Aaron L. Friedberg. The Future of U.S. China Relations: Is Conflict Inevitable? International Security,
Vol. 30, No. 2 (Fall, 2005), pp. 7-45.
57
Ibid, pp. 16-21.
58
CNOOC, China's No. 3 oil company, is 70 percent owned by the state-controlled China National Offshore
Oil.

military strength, challenging position on Taiwan and South China Sea, selling weapons to
U.S. adversaries, and investing in regimes like Sudan and Iran that respectively violates the
human right and seeks nuclear weapons. Therefore, the coming conflict with China is
foreseeable59. Based on this assumption, they considered that once a serious conflict break
out in the future, Unocal, if acquired by CNOOC, would be a part of Chinese power. As the
biggest shareholders, Beijing would treat CNOOC as the extension of its power, denying
Unocals production into the world energy market once conflict broke out. Consequently,
United States would be less secure for less energy in the market. In addition, in terms of
relative gain, plus that the prediction of rising powers behavior mentioned above
corresponded to Chinas overseas expansion, realist feared that every piece of energy China
acquired will automatically harm U.S. energy security and China will continue to expand
overseas that Washington should act to block. Michael Klare thought that, foreseeing the
world with energy shortage, each nation will engage in serious battles for securing finite
resources60. Realism sees China as a rising power and will advance to energy sources
abroad to facilitate oil import to feed domestic surging demand. In this sense, U.S. would
have to contend with China in the oil market.

Liberal Perspective

In contrast to realism, liberalism urged government not to intervene in this case, let
the free market mechanism decided. Their arguments are based on the following concepts.

59

Richard Bernstein and Ross Munro. The Coming Conflict with China, New York: Random House Inc.,
1997.
60
Michael T. Klare. The New Geography of Conflict, Foreign Affairs, Vol. 80, Issue 3 (May/June, 2001),
p49-61.

First of all, more trade and investment will deepen interdependence between two states.
The more both states depend on each other, the less likely they will go to war conflict,
therefore facilitating peaceful relation. Secondly, because a state needs courts, contracts and
reliable rule of law to accommodate itself to international trade, democracy will be
promoted as states deepen their degree of bilateral trades. Thirdly, enhancing bilateral
communication will reduce uncertainty about intentions and increase the capacity of
governments to make credible, binding commitments to each other. Finally, liberalism
emphasizes on absolute gain in the sense that others gain is not our loss. In their
perspective, history is a smoothly ascending curve, not a vicious circle resulting from
recurrent power politics61.
In short, liberalism expects to promote economic development through bilateral
trades and investments that will help avoid conflicts. To them, if U.S. is to prevent conflict
with China, it should increase economic exchanges with China to accelerate its economic
development. Based on the logic of liberalism, they argued that an economically rising
China is positive to peace, rather than a threat62. They saw CNOOCs offer as a pure
economic deal without political consideration in it. Therefore, U.S. government shouldnt
intervene. In addition, they argued that China currently stands outside key international
agreements that monitor and regulate official finance. U.S. should encourage full Chinese
participation in existing agreements and to strengthen these agreements that incompletely
cover energy deals63. They urged Washington to stop treating Chinas surging oil demand
61

Aaron L. Friedberg. The Future of U.S. China Relations: Is Conflict Inevitable? International Security,
Vol. 30, No. 2 (Fall, 2005), pp. 7-45. Robert Powell. Absolute and Relative Gains in International Relations
Theory, The American Political Science Review, Vol. 85, No. 4. (Dec., 1991), pp. 1303-1320.
62
James A. Dorn. U.S. China Relations in the Wake of CNOOC, Policy Analysis, CATO Institute,
November 2, 2005, p. 8.
63
Peter Evans and Erica Downs. Untangling Chinas Quest for Oil through State-backed Financial Deals,
Policy Brief # 154, The Brookings Institution, May, 2006, p. 2.

as a threat and cooperated with China in order to lead it to blend into international
economic regimes64. Allowing CNOOC to merge UNOCAL, to liberalism, was a good
opportunity to force China to follow and respect international agreements.
As for technological innovation, Edward Morse argued that while states with
abundant resources struggled to explore, the overall energy supply around the world would
increase through technology and investment from abroad, therefore mitigating the impact of
climbing global energy demand. Political economy of oil nowadays is no longer zero-sum
game65. Totaling all the gains of each state, the overall world oil supply will be climbing.
Hence, Unocal should accept CNOOCs better economic offer. Besides, Chinas
investment overseas should be encouraged because Chinas abundant funds will benefit
developing countries to explore more energy reserves, overall increasing global oil supply
and thus securing global energy security. David Victor used real statistics to argue that U.S.
government shouldnt meddle in this case because there was only 10% of overseas oil
going back to China. The rest of them actually went to international market$$. To sum up,
liberalism considered this deal and Chinas overseas expansion as not going to harm U.S.
energy security. Instead, it will benefit to the global market, promote openness and
democracy in China and force China to abide by international regulations and agreements.

Why Realism Win

64

David Zweig and Bi Jianhai. Chinas Global Hunt for Energy, Foreign Affairs, Vol. 84, Issue 5
(September/October, 2005), pp. 25-38.
65
Edward Morse. A New Political Economy of Oil? Journal of International Affairs, Vol. 53, No. 1 (Fall,
1999), pp. 18-20.
66
David G. Victor, What Resource Wars? National Interest, Nov/Dec 2007, p.48.

CNOOCs case induced many debates from Realism and liberalism perspectives in
the media and academy. One expected governments intervention, and some others hoped
government staying out of the case. As we saw the outcome, the concept of realism won
over liberalism, exerting greater influence in the Congress to its favor. Under the lead of
Richard Pombo, Representative from Californian with closed relation with Chevron, the
Congress initiated several bills right before they struck the deal. Among them, Energy
Policy Act of 2005 was the last straw to crush CNOOCs intention. Nancy Pelosi was
another important figure in Congress, who was hostile to China for human right issue, to
support tough stance toward China. She called that the Chinese government's control of
CNOOC made the bid possible, not the free market67, thus violating the value of free
market mechanism. Chinas generous financial support complicated the case. The fear of
Chinas overseas expansion has also been reflected in every annual report of US-China
Security Review Commission since 2000.
Another reason CNOOC failed was due to the silence of White House. In contrast
with seeing China as Strategic Partner from the Clinton administration, the President
Bush saw China as strategic competitor. This concept accorded with ideas of blue team.
Both group feared Chinas rising power in the world and condemned the tyranny of
communist rule. As a consequence, blue teams realism was more easily to be accepted by
the Bush administration68. In addition, neo-conservatism that surrounded Bush
administration also considered that Chinas expansive energy policy would harm U.S.

67

U.S. Opens China Energy Office as Chinese State Oil Bids for Unocal, Environment News Service,
Washington, DC, July 1, 2005. http://www.ens-newswire.com/ens/jul2005/2005-07-01-03.asp
68
John Feffer. China: What's the Big Mystery? Foreign Policy in Focus, December 4, 2006.
http://www.fpif.org/fpiftxt/3752

interest. Not only aiming at dominating East Asia, they predicted China also tried to
dominate the world69.
While the Congress and White House were both enveloped by realist ideas from
Chevrons lobbyists, the blue team and neo-conservatism, its almost impossible for
CNOOC to reverse the situation with limited resource and experience in the United States.
Under Congresss hard-line stance, the White House, though fearing the threat from rising
China also, chose to remain silence and free-ride on Congresss action. The Bush
administration was not willing to put U.S. China relation in jeopardy. Claims that
CNOOCs offer was a pure economic deal, and CNOOCs deal would benefit global energy
market, obviously were overwhelmed in the end by the realist ideas that worried Chinas
coming threat and the vague relation between CNOOC and Chinese government.

Conclusion

In this case, even though the liberalism launched several optimistic perspectives
such as the deal will enhance bilateral relation and economic development and promote
democracy in China, political consideration in Washington eventually won over the free
market mechanism. Liberal ideas this time couldnt effectively influence policy outcome
though there were many appeals in media and academy to urge non-intervention. However,
the strength was not big enough to emulate realisms influence. The realists demand for
policy successfully received response from Washington.

69

Thomas Donnelly and Melissa Wisner. Chinese Power Play, Weekly Standard, July 29, 2005.
http://www.aei.org/publications/filter.all,pubID.22923/pub_detail.asp

These two ideas read the rising Chinese power differently. However, they basically
see a states behavior as simply the product of objective and material factors. States
behaviors are driven by international regimes and institutions70. In this sense, they both
omitted that it is possible for states, in the process of development, to be influenced by
subjective factors. Another international relation theory, constructivism, helps fill this void.
Constructivism considered that a states behavior is socially constructed by identities,
strategic cultures and norms. For example, as Chinas joining international society, the
strategic thinking constructed in the cold war era will be likely to alter, advancing toward
more moderate stance and embracing the soft power71. Constructivism observed that the
world trend is not static but changing. While the world proceeds, a states realization to
political and economic affairs might alter. In constructivists view, a states behavior, rather
than hinging on material interest, can be dominated by inherent ideas and perspectives.
Applying the constructivist concept to CNOOCs case, U.S. government should utilize this
opportunity; designing incentive to lead China to give up belligerent behaviors they worried
and also tried to affect Chinas perspective and realization to world affairs. Liberalism,
while being optimistic, has to recognize that Chinas communist government was still
affected by strategic thinking of power struggles deriving from the cold war era. Chinas
climbing military investment can be the proof. Liberalism shouldnt act over optimistically,
predicting China will in the end advance to the rosy picture it envisages and should
incorporate ideas that China might follow the old-time idea of acting like a rising power
who tries to dominate the world.
70

Aaron L. Friedberg. The Future of U.S. China Relations: Is Conflict Inevitable? International Security,
Vol. 30, No. 2 (Fall, 2005), pp. 34.
71
See Joshua Kurlantzick's book Charm Offensive discussing the rise in China's utilization of its growing soft
power. Joshua Kurlantzick. Charm Offensive: How China's Soft Power Is Transforming the World, New
Haven and London: Yale University Press, 2007.

U.S. government chose to accept the idea of Chinas rising threat in this case.
However, if China keeps aware of pressures from Washington, this might force China to
hedge against dependence on oil supplies vulnerable to American power, thus igniting
conflict between U.S. and China. Washington should take liberalisms prediction into
consideration and devised an effective strategy to force China alter strategic thinking. If
U.S. government successfully lead China to the liberalisms optimistic scenario, then
CNOOCs acquiring Unocal will contribute to the global energy market and act as a force
to democratize China, therefore lowering the possibility of energy wars in the future.
Furthermore, China can exert its influence in developing countries, help energy exploration
and excavation, and force those countries to use energy wealth in developing economy
rather than being damaged by domestic unrests. As a whole, this will really enhance the
global energy market.