Can Obama Really Force a Chinese Owned Company to Sell a Wind Farm?
In a word – yes.
Last week the President issued an order requiring Ralls Corporation, which is owned by Chinese nationals (and is closely associated with the Chinese wind turbine manufacturer Sany), to cease development activities and divest its interest in four wind farms in Oregon. The order was issued based on recommendations from the Committee on Foreign Investment in the United States (CFIUS). CFIUS is responsible for reviewing foreign investments in the U.S. to ensure that foreign ownership of U.S. assets will not present a national security risk.
CFIUS, which is an inter-agency committee led by the Secretary of the Treasury has been in place for 37 years and despite a handful of high-profile actions is an often forgotten hurdle in using foreign capital for things like energy infrastructure investment in the U.S. In 2005 CNOOC (the China National Offshore Oil Corporation), which is in the process of buying Canadian oil company Nexen, abandoned its acquisition of Unocal Corporation after it became clear that CFIUS would be used to block its acquisition of the U.S. oil company on the basis that the Chinese government controlled company’s ownership of critical energy infrastructure in the U.S. was a national security risk. (See more: Why China’s Purchase of a Canadian Oil Company is NOT Harmful to U.S. National Security)
The following year rumors and the suggestion by some select members of Congress that they would push for a CFIUS review of the deal scuttled the acquisition of U.S. port operator P&O by Dubai Ports World (Dubai Ports is truly a fascinating story on how Washington really works).
Ralls Intends to Fight the Order
The current Ralls case, requiring the divestiture of interests in four small wind farms isn’t about the ownership of wind farms as critical energy infrastructure — the issue was proximity to a U.S. Navy weapons training and testing facility and the potential for spying or interference with the drone program. This is not the first forced divestiture under CFIUS (the first President Bush forced the sale of a Seattle-based Manufacturing company MAMCO by a Chinese company), but usually CFIUS is invoked before a deal gets done and as Dubia Ports showed, just the threat can be enough to make a company walk away from a deal. (See more: ‘National Security’: Obama Blocks Chinese Wind Farm Ownership in Oregon)
Ralls has publicly stated its intention to fight the order. Regardless of the outcome (and beating CFIUS seems like long odds), this CFIUS order will have a significant cost to Ralls and this wind investment. This incident won’t cause Ralls or Sany to exit the U.S. market (though the absence of the Production Tax Credit might), but it will likely make both groups much more cautious about how they buy and develop wind farms.
Conclusion: A Lesson in Due Diligence
While the direct impact of this presidential order will be negligible in the overall energy investment landscape in the U.S., it is an important reminder of the key role that CFIUS plays in access to capital for the energy market in the U.S. Foreign control over network assets like pipelines and electric transmission, and certainly nuclear generation are particularly likely to result in CFIUS review and action. The result is less foreign capital available to support building and upgrading those types of facilities, which has a trickle-down effect on the rest of the energy industry. Lack of pipelines limits oil and gas exploration, lack of transmission increases the cost for potential electric generation projects.
The Ralls/CFIUS story is big news, if for no other reason than it reminds us of the critical role CFIUS plays with foreign investment in U.S. energy infrastructure as well as how easy it is to miss important aspects of energy deals without very careful project diligence and review. (See more: 5 Reasons Why Good Energy Projects Don’t Get Financed)
2015 EIA Energy Conference
June 15-16, 2015 - Washington, D.C.
Platts North American Crude Oil Summit
February 26-27, 2015 - Houston, TX