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Should China Be Allowed to Buy Texas Oil?

Stocks in this article: CEO CHK

Here's the headline that has everybody all atwitter: China to buy Texas oil.

The China National Offshore Oil Corp (CEO)has indeed announced it will pay $1.1 billion to Chesapeake Energy (CHK) Corporation for a third of the company's South Texas shale resources in the likely to be prodigious Eagle Ford shale formation.

CNOOC will also kick yet another billion dollars to finance drilling costs, and Chesapeake energy's CEO is touting this deal as a great way to create jobs and local and state tax revenues in Texas. The question, of course, is whether China should even be allowed to consummate this deal.

In thinking about the issue, it's important to first note that China is hardly the only foreign entity involved in the Eagle Ford bonanza. Companies from both Canada and Norway have likewise acquired assets in Eagle Ford. So how should we think about this?

The first thing to recognize is that Eagle Ford will be a very important source of both oil and natural gas in the United States. It's the sixth largest discovery of domestic petroleum in our history. For decades, it was ignored. However, because of a new technology called horizontal drilling and advances in so-called "hydraulic fracturing," the oil and gas treasures of Eagle Ford can now be extracted much more easily and economically.

Here, then, is why we should be very leery of allowing a company like the China National Offshore Oil Corp. into the American heartland. For starters, unlike the companies from Canada and Norway, CNOOC is a state owned enterprise and therefore an instrument of a Chinese energy policy based on state capitalism rather than free markets. The Chinese government's energy policy rejects the use of free markets for the sale of energy resources. Instead, it seeks to acquire control of the resources and reserve them for its own domestic use.

Second, with China, there is always the perennial "what's good for the goose is good for the gander" issue. In fact, China recently began an accelerated strategy to develop shale gas within China and will use this latest deal to acquire technologies related to shale gas development as well as knowledge about best drilling practices and other critical information. Of course, once it acquires this technology and information, the protectionist Chinese government will not allow foreign companies the same kind of access to its own shale gas industry.

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