CNOOC, the large Chinese energy company, will buy assets of US firm Chesapeake Energy Corp (NYSE: CHK) for $1.1 billion. Chesapeake holds large reserves of shale oil deposits and those have proven to be a possible alternative to standard crude. China has been aggressive in its investment in energy resources in Brazil, Venezuela, and parts of Africa.

The US government may simply turn down the move by China, much as it did the Huawei offer to buy American network operation 3Com in 2008.

There are two reasons US regulators are likely to reject the CNOOC offer. The first is that shale oil may be deemed “strategic” by the American government. That would be true to the extent that shale production is seen as a way for the US to be less dependent on foreign oil imports. Chesapeake also has created technology to make the recovery of oil from shale more efficient than it has been in the past.

The less obvious reason for a rejection is the growing tension between the two superpowers. GE (NYSE: GE) CEO Jeff Immelt recently said that China does not offer a level playing field for American companies that do business on the mainland. Instead the People’s Republic favors its own industries. There have been several delegations from the US to China in the hope of improving the situation. None appears to have had much success.

In addition, the American government could use the CNOOC deal as a quiet way to send the Chinese a message on the yuan’s artificially low value and the resulting trade imbalance.  It is hard to imagine that the US government would do something so underhanded, but it has relatively few weapons to pressure the Chinese on a long list of problems in which the People’s Republic has the upper hand.

The CNOOC offer for Chesapeake will be rejected, even if it is for the wrong reasons.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.