updated 5/9/2005 9:33:47 AM ET 2005-05-09T13:33:47

China National Offshore Oil Corporation will discuss this month the possibility of making a counter-offer to Chevron-Texaco's $16 billion bid for Unocal, raising the prospect of the first takeover battle between a Chinese company and a U.S. rival.

A counter-bid by CNOOC, China's third largest oil group, would be controversial in the U.S., with many politicians and business lobbyists certain to oppose the attempt by a state-owned Chinese group to buy a US oil rival.

CNOOC management's determination not to give up on Unocal is also likely to reopen a rift within the company's board over the financial and strategic merits of such a large acquisition. Last month, some of the company's non-executive directors were believed to have vetoed the plans by Fu Chengyu, executive chairman, for a Unocal bid.

That show of dissent stalled CNOOC's move — part of China's drive to secure energy supplies to fuel its booming economy — and enabled Chevron to bid for Unocal unopposed.

Days later, Erwin Schurtenberger, an independent non-executive director, resigned from CNOOC's board due to "ill health".

People close to the situation said that although CNOOC had no firm plans for an offer, it had not ruled out going head-to-head with Chevron.

They also said the possibility of a counterbid would be discussed at a board meeting on May 23-24 ahead of CNOOC's annual shareholder meeting.

One person close to the situation said: "Will the board discuss a resolution to bid for Unocal? No. Will the matter be a topic for discussion at the board meeting? Certainly."

CNOOC management's desire to bid for Unocal, which has gas and oil reserves in Thailand, Indonesia and central Asia, has been strengthened by the markets' lukewarm reaction to Chevron's bid, according to the people close to the situation.

Since the cash-and-share offer was announced on April 4, shares in both Chevron and Unocal have fallen more than 7 per cent. An antitrust ruling against the takeover, which would bring together two of the largest US oil groups, could also open the way for a CNOOC bid.

However, analysts doubt whether CNOOC will have the financial resources to top Chevron's bid and pay the $500m break-up fee agreed between the two US companies.

Unocal's market capitalization is similar to CNOOC's and a bid would saddle the Chinese company with debt.

Observers have argued that CNOOC could make better use of its funds by purchasing smaller companies and oil fields. They believe CNOOC may hold back from mounting a direct challenge to Chevron because of the latter's greater financial firepower and the already full price of the U.S. oil giant's bid.

Instead, the Chinese company might be hoping rumours of another possible offer will weaken support within Unocal for the Chevron bid and lead to a breakdown of the merger plan.

CNOOC was unavailable for comment.

Copyright The Financial Times Ltd. All rights reserved.


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