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Chinese government-controlled oil company CNOOC Ltd. said Tuesday it was withdrawing its $18.5 billion cash offer for Unocal Corp. of Los Angeles, blaming unprecedented political opposition on Capitol Hill. “This political environment has made it very difficult for us to accurately assess our chance of success, creating a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction,” CNOOC said in a statement. “Accordingly, we are reluctantly abandoning our higher offer to the clear disadvantage of Unocal shareholders and employees.” The retreat clears the way for Chevron Corp. to buy Unocal for $17 billion, a deal its shareholders are scheduled to vote on Aug. 10. Chevron had to raise its original $16.4 billion offer after CNOOC emerged with an unsolicited counteroffer of $18.5 billion in late June. The news is a terrible blow for CNOOC, China’s third-largest oil company and its sole offshore oil exploration and production company. It’s under pressure to expand its exploration and production to bring much-needed energy resources to the country. So far it has only been able to cobble together small assets through acquisitions. Analysts added, however, that the tilt at Unocal was misguided. “CNOOC handled it very badly, with poor strategy and poor decision-making,” said Fadel Gheit, a longtime oil analyst at Oppenheimer & Co. in New York. “They had the deal almost in their back pocket, but they threw it away, insisting Unocal pay Chevron the breakup fee. Either they got bad advice or they didn’t take good advice.” CNOOC, however, cited as “unprecedented political opposition” U.S. lawmakers’ attempt to replace or amend a decades-old national security review process so that it would apply to its bid for Unocal. They considered the action “regrettable and unjustified.” CNOOC was specifically referring to a plan by the Senate Banking, Housing and Urban Affairs Committee to hold a hearing in September to expand and strengthen the scope of authority in reviewing foreign acquisitions of U.S. companies operating in strategically important industries by a panel called the Committee on Foreign Investments in the United States, or CFIUS. The Senate’s move was viewed as a direct response to CNOOC’s proposed bid for Unocal. A CNOOC spokesman said the company’s board has been in constant meetings over the past 10 days, struggling over all the possible options available to it and whether to raise the offer further or abandon it altogether. In the end, it concluded that political pressure was insurmountable. In its formal statement, CNOOC said it feels “it is no longer in their [shareholders'] fundamental best interests that we pursue our bid in these circumstances.” So what is in the cards for CNOOC? Gheit doesn’t think the company will go after another U.S. company, as has been rumored and which CNOOC didn’t rule out Tuesday. He said the hostility in Washington toward China is “beyond comprehension.” “I hope CNOOC learned something from the experience,” he said. “I don’t know how much they paid their investment bankers — $50 million, $100 million — but whatever it was it was squandered. It didn’t buy them anything. It only gave them a black eye.” Advising CNOOC were: Goldman, Sachs & Co.’s Michael Carr, Bill Wicker, Steven Daniel and Jin-Wong Cai; J.P. Morgan Chase & Co.’s Charles Li, Todd Marin, Leon Ming, Jimmy Eliott, Ivor Orchard, James Roddy and Laurence Whittemore; Davis Polk & Wardwell’s John Amorosi and Chris Mayer; and Herbert Smith’s Ashley Alder and Andrew Tortoishell. Advising CNOOC’s independent directors were: Rothschild’s Andrew Rickards, Neeve Billis and Roger Kimmel; Charles River Associates Inc.; and Skadden, Arps, Slate, Meagher & Flom’s Peter Atkins, Michael Gisser, Gregory G. H. Miao and Richards Butler. Advising Unocal are Morgan Stanley’s Steve Munger, Tom Langford and Dan Ewell; and Wachtell, Lipton, Rosen & Katz’s Dan Neff. Advising Chevron are Lehman Brothers Inc.’s Carlos Fierro, Gary Posternack and Grant Porter; Pillsbury Winthrop Shaw Pittman’s Terry Kee; and Cravath, Swaine & Moore’s Allen Finkelson and Scott Barshay. Copyright �2005 TDD, LLC. All rights reserved.

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