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Committee on Foreign Investment in the United States and Oil

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Published: Tue, 25 Jul 2017

Increased shale gas production has resulted in a low natural gas price that has put many energy companies in the US in financial turmoil – and are, thereby, in need of investors to raise capital. This is evident in the deals between Sinochem and Pioneer Natural Resources for a 40% stake of the Wolfcamp Shale and Chesapeake Energy’s low selling price for the Mississippi Lime joint venture with Sinopec, both in 2013. Firms like Pioneer Natural Resources were looking for opportunities outside unconventional natural gas, and the Sinochem deal helps to finance the more lucrative development of unconventional oil.

Moreover, these investments by the Chinese in the US has helped deepen ties between the two countries, resulting in further collaboration on the exploration for unconventional natural gas, outside of the United States.

Foreign investment and international cooperation in the energy sector are essential for a vibrant modern economy. Chinese investment in the U.S. energy sector has the potential to provide tremendous benefits for both America and China. America’s renewed focus on domestic production and overwhelming need for expansion of the domestic energy infrastructure has left U.S. companies hungry for investment capital. The persistently high levels of unemployment and the jobs that those investments would create add further incentives to support these efforts.

Employment Surge: Must find stats.

Negative: Security threats

Although Chinese investments may benefit the United States economy/companies or the US – China bilateral relationship, the ones by state -owned or state -controlled entities, in particular, have been a constant concern for the US Government, with fears that these investments may be with other strategic goals in mind and could, potentially, pose risks to its economic and national security.

Several cases have garnered the Federal attention and their corresponding intervention, such as CNOOC’s purchase of Nexen, a Canadian energy company with ties to US, as well as the Wanxiang Group’s purchase of the battery maker A123 Systems. Recently, the Committee on Foreign Investment in the United States (CFIUS) reviewed several cases in which foreign purchases of domestic energy companies created national security concerns.

Third Example: In a third case, CFIUS blocked the development of a wind project purchased by Chinese-owned Ralls Corp. from a Greek energy firm called Terna Energy. The wind project, located in Oregon, would connect turbines to a regional electrical grid located near a U.S. Navy facility. A Presidential order forced Ralls to divest all of its interests due to national security risks.

(More info, if needed): Pending CFIUS approval, the China National Offshore Oil Company Ltd (CNOOC) sought to buy Canadian oil and gas company Nexen Inc for $15.1 billion. Nexen controlled oil in the Gulf of Mexico, the Long Lake oil sands project located in Alberta, and the world’s third-largest crude storehouse. CFIUS approved the sale, but due to the project’s proximity to strategic Department of Defense locations in the Gulf, CNOOC must adhere to a broad range of security measures.

CFIUS forced similar concessions in a deal between Wanxiang Group Co., China’s largest auto-parts maker, and a bankrupt electric-car battery company called A123 Systems, Inc. Wanxiang acquired A123’s automotive, grid, and commercial business assets for $256.6 million. The CFIUS would not allow Wanxiang to receive A123 government grants or purchase U.S. government contracts due to security concerns, so a U.S. firm called Navitas Systems LLC purchased these contracts instead.

In 2005, the U.S. Congress (citing security concerns) effectively blocked the attempt by China National Offshore Oil Corp. (CNOOC) to buy Unocal for an estimated $18.5 billion, which had a chilling effect on Chinese investment in U.S. energy assets for several years. However, such investments have been on the upswing since CNOOC’s 2010 and 2011 investments (totalling approximately $2.4 billion) in shale projects led by Cheasapeake Energy Corp.

The blocked cases demonstrate that, while the projects comply with energy initiatives between the U.S. and China, they raise concerns about U.S. national security. China’s ability to infiltrate U.S. power systems, the transfer of key technologies to China, and the proximity of foreign-controlled projects to sensitive military facilities are several of the concerns that account for the CFIUS’s thorough review of recent Chinese purchases, since critical U.S. infrastructure and energy grids are vulnerable to cyber-attacks.

In a recent Wall Street Journal interview, CNOOC’s CEO said that they “learned [that] we need to be more prudent in terms of public relations and political lobbying when dealing with such a big deal. We now understand American politics better.”

Given the current political climate in America, Chinese investors would also do well to pay attention to the biggest driver in American politics today by adding a 4th pillar to the model, namely:

Create U.S. jobs, quantify and publicize job creation and U.S. economic impact, and come to the table with U.S. unions.

  • In January 2012, Sinopec invested $2.2 billion for a one-third stake in oil and gas fields being developed by Devon Energy in Louisiana, Mississippi, Ohio, Colorado, and Michigan.
  • In March of 2011, LDK Solar, a large Chinese manufacturer of solar cells invested $33 million in Solar Power Inc., of Roseville, California, boosting a company with 60 employees.
  • A large order and sizable investment from Winston Battery of Shenzhen, China allowed MVP RV of Riverside, California, a maker of recreational vehicles, to stay in business, saving a company that employs 250 people from bankruptcy.
  • China state-owned Anshan Iron & Steel Group invested $175 million for about a 14 percent stake in a Mississippi rebar plant being built by Steel Development Co (an American startup), creating up to 1,000 construction jobs and 200 permanent manufacturing jobs.

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