If the rumors are true, PetroChina, a Chinese “Government Controlled Entity” (pdf), is on the verge of buying McDermott International, a company that, as I understand things, is the U.S. Navy’s sole provider of nuclear fuel and nuclear fuel assemblies.

McDermott, a Panama “based” corporate tax-avoider, also manages the U.S. Strategic Petroleum Reserve. (along with a lot of other critical national defense infrastructure. Take a look.)

This rumored buy-out comes at a very interesting time. First, McDermott subsidiary Babcock and Wilcox bought out NFS (a competing nuclear fuel provider for the Navy) in January of this year. (NFS was a troubled company that the Springboard covered previously–here, here and here.)

Second, the 2007 National Defense Authorization act, thanks to Representative Gene Taylor (D-MS), mandates that all future big Navy ships employ nuclear propulsion. But, now that we’re locked in and want high-energy/big power generation capabilities, where will the fuel come from? And at what price?

Third, what better way to transform the Chinese Navy’s expected “carrier-building” announcement into a great-power referendum? Rather than a simple, “hey, we’re building our first carrier, whee!” the announcement becomes, “Not only are we building carriers, we now own the means to build…nuclear supercarriers.”

Fourth, given that the purchase may be announced as early as Monday morning, this buy-out of a critical piece of the U.S. Defense Industrial Base risks putting an undeniably sharp edge on China’s upcoming naval celebration.

In the event the rumor is real, and the sale is announced tomorrow (or later this week), as the USS Fitzgerald (DDG-62) arrives for China’s Naval Review and CNO Roughead begins his effort to positively engage China, this takeover offers a humbling example of how financial power can trump even the largest of navies.

If true, this is an old-fashioned big-power nose-tweaking, pure and simple.

To be frank, if this buy-out happens during China Naval Review, we, the United States, will have lost face throughout China and, well, pretty much the rest of Asia. To China’s credit, this financial maneuver is a fascinating geopolitical endeavor that speaks far louder than any conciliatory language the world is likely to hear during China’s Naval Review.

Finally, China’s economic jockeying comes at a time when the Obama Administration is still racing to reset national security policy. There’s a heck of a lot going on, and it all gives SECDEF Gates’ recent comments regarding America’s ability to confront modern-day economic warfare a particular poignancy.

To Gates, a recent wargame was, according to insidedefense.com (subscription):

“…an eye-opening experience and it also reflected some shortcomings in the ability and willingness of different parts of the government to share information openly…”

Amen. Look, has anyone–besides the little ‘ole Springboard–who, I might add, has been hollering about this for a long time–gamed this? Where’s the policy discussion? Why no public or market preparation?

What, pray tell, is the implication of China’s aggressive business play, and, if this takeover does happen, what are our options?

Springboard!




Posted by Defense Springboard in Uncategorized


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  • Byron

    We’re worried about how we’re going to handle pirates with AKs and RPGs, and we’re letting the PRC buy the ONLY source of nuclear fuel rods the Navy has? Just freakin’ lovely!!!

  • RickWilmes

    What is the difference between PetroChina and AIG?

  • UltimaRatioReg

    The difference? About 1.5 billion Chinese.

  • Byron

    Lets see…AIG is owned by American citizens with a bit too much greed on their minds for their own good, and who will eventually pay the price for it. The PRC is a communist state that owns everything, no matter what front is used, and they have the means to deny the USN an incredibly strategic material.

    Clear it up for you?

  • RickWilmes

    PetroChina and AIG are both government controlled entities. In terms of fundamentals there is no difference.

  • Byron

    So you’re saying a nation who’s interests may well not be our own, will in all probability will contests the US in some shape or form, and who’s “private sector” really is a government controlled (by communists!) is the same as a company that is in financial troubled and is working under government restrictions are one in the same? That’s a fine hair you’re splitting, must be some more of that semantics stuff.

  • UltimaRatioReg

    Rick,

    Despite Eliot Spitzer’s assertions to the contrary, AIG does not possess its own army and navy whose role is to possibly fight the United States.

    A subtle difference, but a difference nonetheless.

  • Byron

    The sort of difference that can get Americans killed if the frog jumps the wrong way..that’s NOT a subtle difference

  • UltimaRatioReg

    “A subtle difference, but a difference nonetheless.”

    Sorry, Byron, that was Monday sarcasm.

  • RickWilmes

    As I already stated PetroChina and AIG are government controlled entitites. Springboard wants to

    “Bring McDermott Home.” This is fascism, where there is a semblance of private ownership but the government uses its power to decide where it should be located, Panama or America.

    If we are going to split hairs, Springboards stance and Byron’s and URR’s defense of “bringing McDermott Home,” is fascism as opposed to China’s communism. Fascism and commumism are differentia that fall under the wider concept of statism.

    “Bringing McDermott Home”, AIG, and PetroChina are all specific concrete examples of government controlled entities that are statist in nature. Whether it is fascism or communism they are both wrong and fundamentally there is no difference.

  • Byron

    Sorry myself, URR, wasn’t paying enough attention to who posted ;)

  • Byron

    And Rick, I’ve already gotten enough mud on me, so I’m going to stop arguing with you.

  • RickWilmes

    Wise choice, Byron.

  • UltimaRatioReg

    Rick,

    You are not without a legit point. I am not advocating the feds taking over AIG or any other institutions or means of production. It may result in the permanent alteration of our economy for the decided worst.

    But just the same, the AIG situation is a gradual process that can be undone with the will of the voters, ultimately, and does not concern me nearly as much as China’s forays. They can be much more sudden, unpredictable, and result in a lot more radioactive fallout should, as Byron puts it, the frog jumps the wrong way.

  • http://springboarder.blogspot.com springbored

    Rick, if this country used incentives *and it’s role as one of McDermott’s larger customers* to encourage the company to decide that it is in the corporate/shareholder interest to retire their offshore mailbox, is that facism?

    Or just, um, sound economic management?

    Negotiations between suppliers and consumers happen all the time.

  • RickWilmes

    URR, my point with AIG was to provide an example of where our own government is seizing control of corporations. The government spent $85 billion on AIG. Why not have the U.S. government, spend $85 billion on McDermott to prevent China from buying it instead?

    The point is neither China’s government nor ours should be in the business of buying or bailing out corporations. If McDermott sells out to China than it is a corporation that has no principles and our government would be wise to eradicate it from the face of the earth.

    However, the vast majority of our Treasury Bonds is now owned by China. We can’t have a knee jerk reaction and say, “Bring McDermont Home” because China wants to buy it. We have to look at the underlying causes and see what the root of the problem is and than make the proper long term corrections.

  • RickWilmes

    Springboard,

    how do you define jingoism? A term you used in the thread that you linked with the following term, a Panama “based” corporate tax avoider.

  • http://springboarder.blogspot.com springbored

    Rick, I didn’t say the US should buy anything. But the company does maintain a corporate mailbox in Panama for tax and corporate government purposes. As I wrote before:

    If this country used incentives *and it’s role as one of McDermott’s larger customers* to encourage the company to decide that it is in the corporate/shareholder interest to retire their offshore mailbox (and/or stop looking for a soverign buyer), is that facism?

    Or just, um, sound economic (and national security) management?

  • RickWilmes

    In order for me to properly answer your question, I need to know what you mean by ‘jingoism’. BTW, I’m following the links that you have provided and the more I look the more issues I have with your reasonings.

    But I will deal with that after I understand what your conception of “jingoism” is?

  • Byron

    Time for a BC…

  • dee

    But Woolsey and other speakers laid out various scenarios by which China might disrupt the U.S. economy, try to exert influence, or even launch attacks ranging from huge electronic pulses that would destroy the U.S. high technology infrastructure to a military raid on Taiwan or elsewhere.

    Woolsey likened China’s rush into the Unocal purchase to “somebody who’s new in a school and is a bit of a bully and decides to give someone who’s already in the school a short elbow. This deal is a sharp elbow.”

    http://www.redorbit.com/news/science/174780/chinas_unocal_bid_sparks_house_threat/

    March 18 (Bloomberg) — China’s rejection of Coca-Cola Co.’s $2.3 billion bid to buy China Huiyuan Juice Group Ltd. is the first denial of an acquisition under an anti-monopoly law that’s been criticized since inception for a lack of openness.

    http://www.huffingtonpost.com/2009/03/18/china-cocacola-deal-block_n_176271.html

    My Note: Certainly this “must be a rumor” or we would be forced to admit as Americans that our trade polciy was a farce.

  • Hayball

    There is a reason why Bayer the german chemical and pharmacutical company and Bayer the maker of aspirin in the USA became separate in 1917, or so I was told.

    Babcock and Wilcox being a part of PetroChina can be fixed the same way. Maybe even preemptively.

    The CJCS still advises the NCA, last time I heard.

    So there might be a sliver of hope.

    I don’t think our kids would like the change if nobody does anything.

  • Carl

    I don’t think this purchase will end up being much of a problem either for the Navy or the U.S. First, there would not be any technology transfer allowed. Second, it’s more likely that McDermott or some other subsidiary would be the actual supplier with only financial ties to the Chinese interest. Similarly, most of the U.S. nuclear fuel for commercial plants is manufactured by foreign companies (AREVA, ex B&W / Framatome, and Toshiba, ex Westinghouse). The U.S. subsidiaries are still companies that operate in the U.S. but are owned by the foreign companies.

  • RickWilmes

    Dee, one of the problems with the first article you cited is the following.

    “I don’t think Congress should routinely try to block private-sector deals,” Rep. Joe Barton (R-Texas), chairman of the House energy and commerce committee, said in an interview. “But having said that, I do think we need to revise the CFIUS process in light of totalitarian societies manipulating our free markets.”

    The U.S. economy is not a free market system, it is a mixed economy with some free market policies along with some statist policies. Each time the mixed economy fails, the free market aspects takes the blame for the statist elements. The result is more statist policies.

    Any government controlled entity that attempts to purchase a private corporation or company is not engaging in a private sector deal, contrary to what Rep. Barton thinks. It is government seizure of private property and that is statism. It makes no difference if it is Chinese or American controlled, they are both wrong. The choice we are than left with is to live under Chinese communism or the latest version of fascism which our current government is engaing in.

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