Oil-Thirsty China Reaches for Unocal

That's why state-owned energy outfit CNOOC is making a very rich bid for the U.S. concern. But S&P sees global demand for crude easing

CNOOC's bid reflects China's increasing dependence on imported oil and the country's desire to secure long-term oil supplies. Any dissolution of the Unocal takeover by Chevron will require the payment of a $500 million breakup fee, highlighting the lengths to which companies -- and governments -- will go to secure their energy needs. HIGHER PRICE ESTIMATES. Significant regulatory hurdles need to be overcome before the Chinese oil company can conclude a deal. Such execution risk will lead Unocal's board to consider the "bird in the hand" rule -- an offer that has a strong chance of being consummated is preferable to a bid at a higher price that has a lower chance of completion. And then there's the political angle: China wants to secure its long-term energy needs -- and so does the U.S. Any bid that could be reviewed by a congressional committee will inevitably politicize the takeover. The willingness of CNOOC to beat Chevron's price, which was already rich, reflects energy companies' decision to raise their long-term oil price forecasts from a range of $22 to $28 per barrel to more than $30. This makes acquisitions look more attractive on a net-present-value basis. U.S. outfits such as Chevron were among the first global players to raise their long-term views on prices. In recent weeks we have seen Shell (RD ) and BP (BP ) prepare the ground for similar moves. GROWTH DEBATE. We at Standard & Poor's retain our neutral sector view on energy, believing that slower global growth will act as a drag on oil demand going forward. The IMF is currently forecasting global GDP growth to slow to 4.3% this year, from 5.1% in 2004. Nevertheless, we acknowledge that similar to the tug of war currently under way in the cyclical and defensive sectors, there's a debate over whether or not we will see a growth revival into 2006. For the record, the IMF is forecasting the global economy to expand 4.4% in 2006.