China will win this time. World has changed since 2005.

China National Offshore Oil Corporation (CNOOC) wants to buy 20 leases in the Gulf of Mexico from StatoilHydro. Oil analysts see it as a symbolic move. Is it politically safe for the Chinese to explore for oil in U.S. waters?  CNOOC tried to buy Unocal in 2005 for $18.5 billion but the sale was blocked by the U.S. Congress. The purchase of a small stake in the Gulf of Mexico from a Norwegian company is unlikely to produce a large reaction. The U.S. is trying to improve relations with China.

China today is holding high cards, unlike 2005 when the world was more serene (financially) and CNOOC had plenty of money but was holding deuces and treys politically. A congressional refusal now would trigger strong retaliation from the Chinese. They would cease buying Treasury bonds. A few leases from StatoilHydro is likely to be a mere beginning. What better place to offload their billions of U.S. dollars than the Gulf of Mexico where they exchange an abstraction for a real asset. Not only that, but they can easily use their Treasury bonds as collateral to get ready cash from American bankers to finance drilling and production costs. How can they go wrong? CNOOC plans a total capital and exploratory budget for 2009 of $6.76 which is a 19% increase over 2008. In all likelihood, the2010 budget will at least as large as 2009. This means they may take an active role in bidding for new blocks at the next MMS sale. The Shanghai Zhenhua Heavy Industries Company is now in the business of building offshore floating cranes, pipe laying barges, and offshore drilling rigs. The company is established in Los Angeles, California and fully capable of mobilizing Chinese offshore equipment to the Gulf of Mexico. That would be a notable first in the history of exploration and production in U.S. waters: Chinese rotary tools cutting long ditch in the deep waters of the Gulf of Mexico.

Michael Lynch consults with leading institutions through GLG