July 13,2005

Grassley, Baucus Express Concern Over Potential CNOOC-Unocal Deal

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.Max Baucus, ranking member, today expressed concern to the President over the potential purchaseof the California-based Unocal Corporation by the China National Offshore Oil Corporation(CNOOC) Ltd.

In a letter, Grassley and Baucus said they would welcome a formal review of the transaction.They noted that such a review should take into account the impact this type of subsidized acquisitionmay have on the U.S. economy and its potential threat to our national security interests. Also, thesenators urged the Administration to closely scrutinize any purchase of Unocal by CNOOC Ltd. toensure that it is consistent with China’s World Trade Organization obligations.The text of the Grassley-Baucus letter follows.

July 13, 2005
The Honorable George W. Bush
President of the United States
The White House
Washington, D.C. 20500

Dear Mr. President:

We are writing to apprise you of our concerns with respect to the offer by a subsidiary of the ChinaNational Offshore Oil Corporation (“CNOOC”) to purchase California-based Unocal Corporation.On April 4, 2005, California-based Chevron Corporation announced it had reached a mergeragreement with Unocal. The Federal Trade Commission accepted that merger, pending publiccomment, on June 10, 2005. Less than two weeks later, CNOOC’s subsidiary, i.e. CNOOC Ltd.,made an unsolicited offer for Unocal.

We understand that National Security Adviser Stephen Hadley has committed that theAdministration’s Committee on Foreign Investment in the United States (“CFIUS”) will review theproposed transaction for national security implications if Unocal eventually accepts the offer fromCNOOC Ltd. We would welcome such a review.

CNOOC is wholly-owned by the Chinese Government. And CNOOC owns 70 percent of CNOOCLtd. According to at least one press report, the higher offer by CNOOC Ltd. relies upon significantsubsidies in the form of low- or no-interest loans from its government-owned parent corporation.It is reported that without those subsidies, the offer from CNOOC Ltd. would be valued lower thanChevron’s outstanding offer.

The offer by CNOOC Ltd. for Unocal raises an important question; namely, whether it is appropriatefor state-owned enterprises to subsidize investment transactions to acquire scarce natural resourcesthat are in high demand. When government subsidies are directed toward the acquisition anddevelopment of scarce resources, any ensuing market distortions should be of particular concern.Such subsidies may facilitate the allocation of scarce resources to inefficient or less-efficientproducers. Any review by CFIUS should take into account the impact this type of subsidizedacquisition may have on the U.S. economy and its potential threat to our national security interests.

Separately, we hope that any purchase of Unocal by CNOOC Ltd. will be closely scrutinized by theAdministration to ensure that it is consistent with China’s WTO obligations. During the negotiationof China’s accession to the World Trade Organization, there were extensive discussions with Chinaon the role of state-owned enterprises. The Working Party report on China’s accession states thatthe representative of China emphad the evolving nature of China’s economy and that decisionsby state-owned and state-invested enterprises had to be based on commercial considerations asprovided in the WTO Agreement. The Administration should undertake a review of the structureof any final transaction in the context of the representations and commitments China made whenjoining the WTO.

Thank you for considering our concerns, both in the context of the offer by CNOOC Ltd. for Unocalas well as with respect to any similar transactions in the future.


Charles E. Grassley 

Max Baucus
Chairman Ranking Member

cc. The Hon. John W. Snow
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Hon. Rob Portman
United States Trade Representative
Winder Building, 600 17th Street, NW
Washington, D.C. 20508

The Hon. Stephen J. Hadley
Assistant to the President for National Security Affairs
The White House
1600 Pennsylvania Avenue, NW
1st Floor, West Wing
Washington, D.C. 20500