June 21 (Bloomberg) -- CNOOC Ltd., China's largest offshore oil and gas producer, may bid about $20 billion in cash for Unocal Corp., the eighth-biggest U.S. oil company, trumping an offer from Chevron Corp., people familiar with the plan said.

The Beijing-based company will offer about $71.50 a share, 10 percent higher than a bid made by San Ramon, California-based Chevron on April 2, the people said, asking not to be identified. It would be the world's second-largest cash offer for a company in at least six years, data compiled by Bloomberg show.

China needs overseas energy assets to help fuel its $1.65 trillion annual economy, the world's fastest-growing major market. Paying with borrowed funds would cost state-controlled CNOOC about $1.2 billion in yearly interest payments, the same as Unocal's net income in 2004.

``It's a relatively high price to pay,'' said Marc Faber, who oversees about $300 million as managing director of Hong Kong- based Marc Faber Ltd. ``The Chinese are willing to pay top dollar for oil reserves and the purchase may not look so stupid in the long term.''

The company may use some of its $3 billion in cash and borrow the remainder from banks to finance the bid, the people said. CNOOC will seek approval for a bid from its eight-member board as soon as today, they said.

CNOOC's Chief Financial Officer Yang Hua declined to comment today.

Risk

In March, the company's independent directors delayed a vote on the issue and requested more information to address concerns an acquisition carried too much risk in terms of strategy and funding, they said.

Chevron is offering Unocal shareholders a combination of 0.7725 Chevron shares plus $16.25, or 1.03 Chevron shares or $65 in cash. Shares of Chevron last traded at $59.34 in the U.S. The acquisition would boost its daily output by about 16 percent.

CNOOC needs to move quickly on its bid for El Segundo, California-based Unocal because the U.S. Securities and Exchange Commission is poised to approve the disclosure documents on Chevron's bid. The Federal Trade Commission, the U.S. antitrust regulator, approved Chevron's takeover plan on June 10.

The Chinese company's bid would have to be approved by U.S. regulators amid concern about the control of Unocal's energy assets shifting to China. Two Republican congressmen, Richard Pombo and Duncan Hunter, on June 17 wrote to U.S. President George W. Bush seeking a review of any bid by CNOOC for Unocal on national-security concerns, the Asian Wall Street Journal reported yesterday.

Politically Sensitive

``This is a politically sensitive issue here,'' said Michael Cuggino, who oversees $360 million at Pacific Heights Asset Management LLC in San Francisco, including Chevron stock. ``We're talking about oil and this a time when there is a shortage of oil.''

CNOOC indicated it would finance the acquisition through bank debt and available cash, and attached proposal letters from potential financing sources, according to a May 26 filing made by Chevron to the U.S. Securities and Exchange Commission.

``Something of that size would be difficult for the company to digest given its current balance sheet,'' said John Bailey, an analyst at Standard & Poor's in Hong Kong. ``It depends on exactly what they do and how they fund it. We're not privy to it at this stage.''

Oil Prices

JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG managed an $850 million sale of bonds convertible into CNOOC shares in November, the largest such sale by a Chinese company to overseas investors.

CNOOC is attempting to buy Unocal as crude oil rose to a record of more than $59 a barrel in New York yesterday. Crude oil for July delivery rose 90 cents, or 1.5 percent, to $59.37 a barrel on the New York Mercantile Exchange, the highest closing price since trading began in 1983. China, Asia's second-biggest economy, is the world's second-largest user of oil after the U.S.

Goldman Sachs Group Inc. and JPMorgan are advising CNOOC on the transaction. The New York-based investment banks would share about $200 million in fees for a successful takeover of Unocal, the people said.

Goldman spokesman Edward Naylor and JPMorgan spokeswoman Megan Donald, both based in Hong Kong, declined to comment.

CNOOC's Chairman and Chief Executive Officer Fu Chengyu flew to El Segundo, California to meet with Unocal executives on Dec. 26 and indicated the Chinese company would make a bid for the U.S. oil producer, according to Chevron's regulatory filing.

U.S. Trip

That trip to the U.S. came five days after a board meeting at Hong Kong-listed CNOOC on Hainan Island in southern China, at which Fu hadn't raised the possibility of a purchase, the people said.

Erwin Schurtenberger, a former Swiss ambassador to China, quit as an independent director at the Chinese company from April 1 -- two days after a March 29 and 30 board meeting -- citing ill- health. Kenneth Courtis, vice chairman of Goldman Sachs Group Inc. in Asia, Evert Henkes, a former chief executive of Shell Chemicals, and Sung Hong Chiu, a solicitor in Australia, remain on the board.

Aloysius Tse, 57, a former partner at KPMG, was hired on June 8 to replace Schurtenberger, 65.

The record cash offer for a company was made by Unilever NA as part of its $24 billion takeover of Bestfoods in 2000.

CNOOC would also have to pay Chevron a $500 million break up fee, according to the regulatory filing made by Chevron, details of which were confirmed by people familiar with the events.

``Chevron may get the break up fee,'' Cuggino said. ``It may still put in a counter-offer. Why not?''

Shares Lag

Shares of CNOOC, unchanged this year, fell to HK$4.15 today, giving the company a market value of about $22.5 billion. Unocal shares gained 47 percent to $63.47 in the same period, giving it a value of about $17.25 billion.

Shares of eight rivals to Unocal, including Woodside Petroleum Ltd., Australia's second-biggest oil and gas producer, and Marathon Oil Corp., the fourth-largest U.S. oil company, rose by an average of 40 percent in 2005.

Unocal pumped the equivalent of 410,670 barrels of oil a day last year worldwide. About 62 percent of Unocal's output is natural gas, compared with 28 percent at Chevron.

CNOOC, which has missed its production and budget targets for the past two years, said in February it plans to increase total output to the equivalent of 160 million to 165 million barrels of crude oil this year.

China's oil import costs rose 86 percent to $4.66 billion in May because of higher prices and increased purchases to meet soaring fuel demand. China's economy has averaged more than 9 percent annual growth during the past two decades.

CNOOC is about 71 percent owned by state-controlled China National Offshore Oil Corp.

To contact the reporter on this story: Matthew R. Miller in Hong Kong at mmiller31@bloomberg.net. Rob Stewart in Hong Kong at r.stewart@bloomberg.net

Last Updated: June 21, 2005 03:07 EDT