Oil Investors Parry China's Move for Foreign Energy Deals 
By David Lague
January 4, 2006
The New York Times
Original Source: http://www.nytimes.com/2006/01/04/business/worldbusiness/04cnooc.html

BEIJING, Jan. 3 - China's efforts to secure reliable supplies of foreign energy were dealt a setback by independent shareholders of one of the country's top oil companies.
Minority investors at Cnooc, a Chinese oil company that is publicly listed in Hong Kong, blocked a proposal over the weekend that would have allowed its government-owned parent to invest in overseas oil and gas reserves, Cnooc said on Tuesday. 
The proposal would have cleared the way for the parent to engage in many of the same activities that Cnooc does.
The rebuff comes as China, now the world's second-largest consumer of oil after the United States, intensely seeks new sources of energy. The parent company of Cnooc, the China National Offshore Oil Corporation, is owned by the government, while Cnooc is 71 percent owned by its parent. 
When Cnooc went public in 2001, the two companies struck a noncompetition agreement under which Cnooc would specialize in offshore exploration and production, while the China National Offshore Oil Corporation would concentrate on processing and on domestic oil and gas production.
Shareholders feared that the proposal could diminish Cnooc's value, as well as cede some of its independence. An influential Hong Kong stockholder, David Webb, led the opposition, arguing that minority shareholders were being asked to make a sacrifice without compensation.
We urge investors to vote against this value-destroying proposal, he said on his Web site, Webb-site.com. Why give up something so valuable for nothing?
Under Hong Kong listing rules, companies are required to seek approval from minority shareholders for changes like this.
Cnooc said it regretted that 59 percent of independent shareholders had opposed the proposal in the Saturday vote.
The amendments would not affect the existing rights enjoyed by the company, Cnooc said. Moreover, it would provide the company with greater flexibility to develop new projects with a lower risk.
Energy analysts said the proposal suggested that China wanted the parent of Cnooc to have the freedom to make politically charged investments in countries like Sudan or Iran, and possibly offer above-market prices for reserves.
State-owned enterprises have perhaps more options than international oil companies, said Victor Shum, an analyst with the energy consultants Purvin & Gertz, based in Singapore. Without shareholders, they can go places that might not be politically acceptable.
Indeed, securing supplies could become a diplomatic challenge for Beijing. Some analysts noted that China buys about half of Sudan's oil exports and owns a large stake in a consortium drilling for oil in that country. Last year, Beijing consistently blocked moves by the United Nations to punish Sudan over the continuing atrocities in the region of Darfur.
China's search for energy became an international issue last year when intense political opposition in the United States contributed to the failure of Cnooc's $18.5 billion bid for Unocal.
In December, however, Cnooc's management asked for shareholder approval to overturn the noncompete agreement so its parent could invest in oil and gas reserves without fear of a reaction from investors over price or political risk. If these investments were successful, Cnooc would be able to buy them from the parent company, the managers explained.
But shareholders may have also feared that Cnooc would be surrendering too much of its autonomy in approving the change, analysts said.
Perhaps one could surmise that they wanted the listed company to be more independent and decide what to buy on their own, rather than becoming an arm of a state-owned company, Mr. Shum said.