Chinese Drop Bid To Buy U.S. Oil Firm

"This political environment has made it very difficult for us to accurately assess our chance of success, creating a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction," Cnooc said in a written statement.

At first, Cnooc hoped that opposition would ease as the company's lawyers and lobbyists in Washington made the case that the offer was strictly a commercial transaction.

The company argued that Unocal accounts for only a tiny fraction of U.S. oil production and that it would sell any U.S. assets deemed critical to national security.

People close to the company said Cnooc was also prepared to eliminate its reliance on financing by state-controlled Chinese banks.

But Cnooc's lobbying failed, and opposition in Washington grew stronger, culminating last week in an amendment to the energy bill to require an extensive review by the secretaries of defense, energy and homeland security before Cnooc could buy Unocal.

Cnooc came closest to winning support from Unocal's board on July 15. On that day, Unocal chief executive Charles R. Williamson told Fu that if Cnooc raised its $67-a-share bid, it could probably knock out Chevron. But Fu said he would raise the bid only if Unocal agreed to pay a $500 million breakup fee to Chevron. Cnooc had previously offered to pay the fee.

Sources close to the bid said Fu feared that Cnooc would pay the breakup fee, only to see a takeover blocked in Washington. Such an embarrassing outcome could have damaged Fu's standing as a prominent member of the Communist Party.

On July 20, Chevron raised its initial $16.5 billion bid and added a larger cash component. Unocal's board quickly endorsed the new offer and recommended that shareholders approve it. Cnooc spent the next 12 days considering whether to raise its offer and finally decided it would be futile.

Sen. Byron L. Dorgan (D-N.D.), one of several lawmakers who proposed legislation to block a takeover of Unocal by Cnooc, said Congress's actions may have played a part in Cnooc's decision.

"I expect it had some impact because it became a fairly controversial proposed purchase," Dorgan said. The issue will not go away simply because Cnooc's bid has ended, he said.

A full-scale federal review of China's energy needs -- mandated in the energy bill -- will go on, Dorgan said. It will specifically examine the issue of Chinese-controlled companies purchasing U.S. oil firms.

"Something is going to have to happen with respect to the Chinese trade situation," Dorgan said. "I don't know what it is, but we can't continue down this path. It's just unsustainable. Congress ultimately will have to address it because I don't think the administration will address it."

Wall Street observers said Cnooc made critical errors in its bid for Unocal, including not making an offer sooner and not seeking out a U.S. company to join its bid to defuse some of the opposition.

"It serves as a stark reminder that it isn't always just about price," said Stefan M. Selig, vice chairman of Banc of America Securities. "Timing and tactics matter."

Staff writer Jonathan Weisman in Washington contributed to this report.