The battle for Unocal, the large independent American oil company, is shaping into as much a test of Chinese-American strategic and economic relations as it is a boardroom showdown.
Most takeover battles can be settled by price - the highest bidder wins. But judging by the sharp reaction yesterday in Washington, that may not be the case with Unocal.
Just a day after the China National Offshore Oil Corporation, or CNOOC, one of China's largest state-controlled oil companies, made an unsolicited bid of $18.5 billion for Unocal, senators and representatives, as well as lawyers, bankers and lobbyists, are taking jabs at what may become one of the thorniest strategic business challenges facing the administration.
At issue is whether CNOOC can buy Unocal, which in April agreed to a $16.4 billion merger deal with Chevron, the American energy giant.
The unexpected foreign bid for Unocal comes at a time when oil prices are hitting $60 a barrel, energy reserves are gaining more value, and the United States is concerned about its own oil and gas resources. At the same time, the administration needs to work with China on trade and currency issues, even as concerns are increasing about the growing economic power of China.
"It does raise questions about how much of the country we are willing to sell to a Communist country that we might be fighting someday," said Michael O'Hanlon, an international military specialist at the Brookings Institution. But he added, "I'd be surprised if we really fall on our sword to prevent the sale."
CNOOC's bid is also forcing Unocal shareholders to weigh the higher price that the Chinese are willing to pay against the risks that the deal faces in Washington. On top of that, there is the possible backlash that might arise from selling a potentially strategic American asset to China.
Unocal said that it had received permission from Chevron to hold discussions with CNOOC.
The question is how - if Unocal decides to switch from Chevron to CNOOC - the politics will play out in Washington, where critics are already speaking out and where the deal would be subject to approval by the Committee on Foreign Investments in the United States. The panel, a federal multiagency group, can prevent any foreign investment on the grounds of national security.
For years, the government has placed restrictions on the extent of foreign ownership in a variety of industries, from airlines to the media to military contractors. In the past, these restrictions have mostly affected developed countries like Japan and Britain.
"This is a remarkable arrival of China into the world of global big business deals and international investing," said Clyde V. Prestowitz Jr., a former trade negotiator in the Reagan administration and president of the Economic Strategy Institute in Washington. "And it does raise the issue of whether this gives influence or some kind of potential importance to a government that may not always be friendly to us."
In Washington, CNOOC is already laying the groundwork. It has hired Public Strategies, a public relations firm whose vice chairman, Mark McKinnon, led President Bush's media campaign in the 2004 election. The company has also lined up some of the nation's savviest financial advisers - among them Goldman Sachs and J. P. Morgan - as well as such well-connected legal and lobbying firms as Akin Gump Strauss Hauer & Feld and Davis Polk & Wardell.
Many in Washington said that the deal, on its merits, might gain approval from the foreign investment committee. In any case, the committee would not review the case until a formal deal is completed. In recent deals involving China, the committee's responses have been mixed.
In 2003, a negative review by the foreign investment committee caused Hutchison Whampoa, which is based in Hong Kong, to withdraw a bid for Global Crossing, the telecommunications carrier that later filed for bankruptcy. But this year, the committee permitted the $1.75 billion sale of I.B.M.'s personal computer business to Lenovo of China.
"The national security argument is a fair one," said William A. Reinsch, president of the National Foreign Trade Council and a former trade official in the Clinton administration. "When you talk about energy supplies, and the market is tight, there is a national security issue. You are going to have a lot of people pounding the table."
CNOOC is already trying to play down any concerns that the transaction could hurt the American oil and gas markets. It is stressing that 70 percent of Unocal's oil and gas reserves are in Asia and that its American reserves amount to only about 1 percent of America's oil consumption, with none of it now supplying the military.
Unocal also has a pipeline hooked up to American strategic oil reserves, as well as a rare-earth mine, the only one in the United States. CNOOC has said it will consider selling these assets, if that is necessary to close the deal.
In addition, CNOOC has promised not to take supplies from Unocal's oil and gas reserves in the United States and sell them outside the country. It also said it would retain "substantially all" of the American employees.
In Washington, two Republican congressmen, Richard W. Pombo, chairman of the House Committee on Resources, and Duncan Hunter, chairman of the House Armed Services Committee, wrote to President Bush last week, saying that "such an acquisition raises many concerns about U.S. jobs, energy production and energy security."
"We fear that American companies will find it increasingly difficult to compete against China's state-owned and/or controlled energy companies, given their mandates to supply China's ever-growing demand for energy, which will increasingly need to come from foreign sources," the letter said.
For China, which is scouring the world for oil, gas and minerals to help power its economy, the deal is important. That puts the administration in an awkward position as it tries to negotiate a variety of trade frictions and geopolitical debates.
"The deal has got the administration over a barrel," said Michael R. Wessel, a member of the United States-China Economic and Security Review Commission, a group established by Congress. Not only is the administration trying to work out trade issues with China over textiles, currency and a number of other matters, it is also increasingly relying on China to play a more aggressive role in containing North Korea.
"We want the Chinese to invest part of their dollars in our economic system," Mr. Wessel said, "yet we have to worry about the impact of this transaction on our national security. Everyone is concerned about the migration of jobs and research and development to China. Now we have oil hitting $60 a barrel. China is going to be on the center of our radar screen."
For CNOOC, an offshore oil company, Unocal offers huge gas reserves in 14 countries. It has Asia's largest storehouse of liquefied natural gas. A combined company would go from a Chinese offshore oil producer with high expenses, as it searches for oil around China, to a diversified oil and gas company with global reserves.
Oil industry analysts offered mixed views about a potential deal.
"There are a lot of people in Washington who are really torn," said Robin West, chairman of PFC Energy, an oil consultant in Washington. "They believe in open markets and don't want to exacerbate matters with China. Yet, do you want a Chinese company that doesn't play by American rules to take advantage of American rules and get an American company?"