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CNOOC-Unocal Deal Would Mark Rebound in Foreign Investment in U.S. Energy

If the proposed $18.5 billion purchase of Unocal by Chinese government-owned China National Offshore Oil Corp. (CNOOC) is successful it would mark a turnaround in foreign investment in U.S. energy operations from the steep decline in 2003, according to data released last week by the Energy Information Administration (EIA).

EIA's report on foreign investment in U.S. energy assets shows that total direct acquisitions of U.S. energy assets by foreign investors fell to only $2.7 billion in 2003 from $18.5 billion in 2002, $14.2 billion in 2001, $44.1 billion in 2000 (BP-ARCO merger), and a recent peak of $58 billion in 1998 when BP purchased Amoco for $57 billion.

However, not since Petroleos de Venezuela SA (PDVSA), Venezuela's government-owned oil company, purchased CITGO in the early 1990s has there been such a large purchase of a U.S.-based energy company by a foreign government-owned company, said EIA's Larry Spancake.

"There were the two major BP deals [purchase of Amoco in 1998 and purchase of ARCO in 2000], but those didn't involve foreign governments. I've been doing this for 10 years and the PDVSA purchase of CITGO had already taken place...but I think we'd be talking about something comparable to that. It's very unusual for a government firm to do this."

The CNOOC transaction is considered the largest foreign acquisition attempted by a Chinese company, and it would be the first time that companies in China and the United States were engaged in a takeover battle. CNOOC is 70%-owned by the Communist Chinese government.

However, the combined company would have 85% of its reserves in Asia. More than 50% of Unocal's first quarter net exploration and production earnings came from its Asian operations.

There has been a lull in large mergers and acquisitions of this kind, according to EIA data. The total value of all worldwide mergers and acquisitions, not just direct mergers and acquisitions by foreign investors in the U.S. energy industry, was down 18% in 2003, its third consecutive year of decline, EIA reported. The value of worldwide mergers and acquisitions in the oil and gas industry and the utilities industry fell much more sharply in 2003, 64% and 51%, respectively. The smaller decline for utilities allowed them to surpass oil and gas in the ranking of industries by the value of mergers and acquisitions completed, EIA said.

Direct energy acquisitions by foreign investors in 2003 were highest in petroleum refining and marketing. While electric power and midstream natural gas also experienced substantial direct acquisitions by foreign investors, direct investment in oil and gas production, which often has the highest level of activity by foreign investors, fell to its lowest level (in current dollars) since 1999, according to the EIA report.

Direct divestitures of U.S. energy assets by foreign investors in 2003 fell to their lowest level (in current dollars) since 1999, although they exceeded direct acquisitions for the first time since 1994. Direct divestitures were led by oil and gas production.

For more from the EIA report, go to http://www.eia.doe.gov/emeu/finance/fdi.html.

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