Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

China's state-owned China National Offshore Oil Corporation, Ltd. (CNOOC), the country's largest offshore oil producer, announced on Tuesday that it has dropped its bid to acquire Unocal Corporation, the US's eighth-largest crude oil company. CNOOC management pointed to US political challenges to its bid, rather than economic considerations, as the primary reason for its withdrawal.  While political challenges to the acquisition of Unocal by CNOOC were likely insurmountable, CNOOC, in our view, over-reached in making what we regarded as a low-quality bid for the US oil giant.

In a this Web log's Post 11 dated 2005.06.07, we said the following.

"We regard a successful bid by CNOOC for Unocal as unlikely, but CNOOC's mere interest in such a deal - at this late stage of final merger negotiations between Chevron and Unocal - emphasizes the gathering intensity of the worldwide scramble for energy security, and the increased importance that China attaches to energy reserves that are 'closer to home'."

Now that CNOOC has "tested the waters" with regard to directly acquiring US oil reserves and has failed in that bid due to US national security concerns, we expect that the intensity of China's hunt for "neighborhood" oil reserves - Unocal owns significant off-shore Asian oil reserves - is likely to intensify. This intensification could manifest itself most noticeably in the East China Sea where China and Japan continue to dispute the location of their common Exclusive Economic Zone (EEZ) border and where Japan has recently awarded drilling rights for blocks inside of the EEZ border claimed by China.  Our most recent update regarding energy competition in the East China Sea can be found in this Web log's Post 38 dated 2005.07.16.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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