CNOOC Chairman Says Oil Firm May Increase Its Offer

Fu dismissed concerns that his company might hoard energy for China's use, saying that if CNOOC closes the deal, Unocal will continue to serve its existing customers in the United States and Southeast Asia.

"I don't see any national security issue to this," he said.

In an attempt to underscore that point, CNOOC last week filed for a review from the Committee on Foreign Investment in the United States, a panel that assesses the national security implications of foreign firms taking over U.S. companies.

Fu is widely seen as the driving force behind his company's pursuit of Unocal. Educated at the University of Southern California, he is a veteran of the executive ranks at several foreign energy companies, among them Amoco, Chevron and Shell. Jocular and relatively comfortable in English, he is touted here as part of China's new face -- a symbol of a once-insular country turning outward, one whose companies are thinking globally and operating with increasing independence from the state.

But that image is proving a tough sell, as CNOOC seeks to mollify critics in Washington. Fu heads not only CNOOC but also its fully state-owned parent company, China National Offshore Oil Corp., which holds 70 percent of CNOOC's shares. He owes those posts to appointments by the Communist Party, of which he is a member. CNOOC's parent is controlled by the State Administration for State-Owned Assets, the holding company for China's State Council, the functional equivalent of the U.S. Cabinet.

Analysts say Fu is playing two conflicting roles at once. He is the head of a profit-making company whose shares trade publicly on stock markets in New York and Hong Kong and whose shareholders demand profit. He is also accountable to a government that has grown keen to lock up new stocks of energy overseas by buying into oil and gas fields at whatever the cost.

"There is no way that CNOOC can make the decision to merge with Unocal without substantial government support and orchestration," said Li Weijian, an overseas energy expert at the Shanghai Institute for International Studies. "The oil industry is the most important industry for the Chinese government. Any projects within the industry have to meet the strict requirements of China's oil security strategy."

Fu denied that he and his company are agents of state policy, but he declined to state clearly how he balances his roles. He added that the Chinese government does not directly finance the company and therefore does not care what CNOOC does with its money. He said China's energy security concerns are not his problem. "That's not our job, that's the government's job," he said. "We are running the business on commercial terms."

Those pointing to CNOOC's bid as a sign of unfair trade have focused on two issues -- the terms of finance and the purchase price, which analysts say is far higher than the market dictates. CNOOC is worth $22 billion, yet it is offering $18.5 billion in cash for Unocal, aided by $7 billion in loans from its state-owned parent, with $2.5 billion of that interest-free. The bulk of the remainder would come via loans from the Industrial and Commercial Bank of China, a state-owned lender. Without generous, state-guided credit, CNOOC could never contemplate the deal, analysts say.

Fu said that under China's tight controls on capital, the deal requires central government approval to shift such a large sum overseas. But he said the decisions by the state bank and CNOOC's parent to extend credit reflect only the commercial merits of the deal.

Ultimately, he said, CNOOC's purchase of Unocal would further the advance of private enterprise in China: If the deal goes through, CNOOC will issue more shares, diluting the government's ownership.

CNOOC made its own road much harder by waiting until Chevron already had a deal in hand to offer its own bid, Fu acknowledged. Unocal shareholders are set to vote on Chevron's offer on Aug. 10. Chevron is now using the furor in Washington to its advantage, seeking to persuade Unocal shareholders to take its lower bid by asserting that CNOOC's offer might not pass muster with U.S. regulators.

Fu said his company delayed action because his governing board opted to first study Unocal's holdings more intensively. He pointed at the timing as evidence that his company takes no orders from the government.

If it all leads to failure -- if Unocal shareholders conclude the risks are too great and go with Chevron, or if the Bush administration blocks a deal -- Fu said he would have to reexamine his basic understanding of free trade.

"I would suddenly find out that what Westerners taught us is not the way the West wants to go," he said.

Special correspondents Jason Cai and Eva Woo in Shanghai contributed to this report.