Chinese investment in the U.S. energy sector has the potential to provide tremendous benefits for both America and China. America’s renewed focus on domestic production and overwhelming need for expansion of the domestic energy infrastructure has left U.S. companies hungry for investment capital. The persistently high levels of unemployment and the jobs that those investments would create add further incentives to support these efforts. Meanwhile, China has been aggressively expanding its outbound investment activity in an effort to, among other things, develop their distribution, marketing, and innovation skills.

In 2005, the U.S. Congress (citing security concerns) effectively blocked the attempt by China National Offshore Oil Corp. (Cnooc) to buy Unocal for an estimated $18.5 billion, which had a chilling effect on Chinese investment in U.S. energy assets for several years. However, such investments have been on the upswing since Cnooc’s 2010 and 2011 investments (totaling approximately $2.4 billion) in shale projects led by Cheasapeake Energy Corp. Those transactions demonstrated a successful model that can be followed for future investment, namely:

  1. Utilize joint ventures with local companies or small stakes rather than large high-profile transactions;
  2. Take minority positions initially without significant influence over day-to-day operations and management; and
  3. Adequately address regulatory concerns around advanced U.S. technology or expertise.

In a recent Wall Street Journal interview, Cnooc’s CEO said that they “learned [that] we need to be more prudent in terms of public relations and political lobbying when dealing with such a big deal. We now understand American politics better.”

Given the current political climate in America, Chinese investors would also do well to pay attention to the biggest driver in American politics today by adding a 4th pillar to the model, namely:

  1. Create U.S. jobs, quantify and publicize job creation and U.S. economic impact, and come to the table with U.S. unions.

Using this model, several recent transactions have successfully navigated the regulatory process and avoided significant congressional and public scrutiny, including:

  • In January 2012, Sinopec invested $2.2 billion for a one-third stake in oil and gas fields being developed by Devon Energy in Louisiana, Mississippi, Ohio, Colorado, and Michigan.  
  • In March of 2011, LDK Solar, a large Chinese manufacturer of solar cells invested $33 million in Solar Power Inc., of Roseville, California, boosting a company with 60 employees.  
  • A large order and sizable investment from Winston Battery of Shenzhen, China allowed MVP RV of Riverside, California, a maker of recreational vehicles, to stay in business, saving a company that employs 250 people from bankruptcy.  
  • China state-owned Anshan Iron & Steel Group invested $175 million for about a 14 percent stake in a Mississippi rebar plant being built by Steel Development Co (an American startup), creating up to 1,000 construction jobs and 200 permanent manufacturing jobs.

According to a 2009 report by the Political Economy Research Institute, “How Infrastructure Investments Support the U.S. Economy: Employment, Productivity and Growth,” investments in energy infrastructure provide a tremendous amount of job growth, as shown in the table below:

Job Creation per $1 Million Investment

Please click here to view table.

Using this type of supportive data, Chinese investors can engage media, local communities, and unions to highlight the positive impact that their transactions will have on U.S. job growth.
 
According to their website, the United Steelworkers (USW) recently signed agreements with Chinese power companies, A-Power Energy Generation Systems and Shenyang Power Group to supply wind turbines to a Texas wind farm. Initial criticism of this transaction (including use of U.S. stimulus money) faded when the two Chinese companies agreed to build as many of the turbines as possible in the U.S., buy 50,000 tons of steel from American mills, set up a facility in Nevada, and thereby create up to 1,000 American jobs. The USW called this a “vision for win-win relationships between manufacturers and workers” and Jinxiang Lu, chairman and chief executive of Shenyang Power, agreed and said talking to the union enabled him to see this vision.

Further development of energy investment partnerships between the world’s two largest economies will be a critical aspect of sustained growth and innovation in the long term. While the Cheasapeake deal model still prevails, added focus on the creation of U.S. jobs can be helpful to (i) reach out to local communities, (ii) allay public concerns, and (iii) create stronger strategic alliances with key U.S. corporations.