I have long suspected this will be the deal breaker. Now as news of the negotiation on specific terms arrives, it becomes more imminent.
The problem lies in the $500M break up fee for Chevron, and the uncertainty in CFIUS approval. Unless CFIUS approval went through before the break-up deadline with Chevron in August, this deal is doomed to fail.
Why? Because it is unlikely (and irresponsible to its shareholders) if CNOOC agrees to pay for the $500M when there is uncertainty that the deal may be blocked by political pressure. On the other hand, Unocal board cannot accept the CNOOC bid without a firm guarantee of the break up fees. Therefore, the priority for CNOOC is to get the deal approved before the deadline to remove the uncertainty, which now seems hard to achieve. As a result, I conclude that the deal will very likely fall through and Unocal board will accept Chevron's offer. If Unocal board recommends the CNOOC offer, they will risk being responsible for paying Chevron the $500M break up fee. Even if the CFIUS uncertainty is only 1%, no one is going to risk it. So it is the uncertainty that will kill this deal.
As for CNOOC, they didn't spend too much on this deal yet, as the investment banks are working for free. They might have spend $1M or so on P.R. and Rothschild, to learn a valuable lesson in corporate M&A. More importantly, they become more experienced after testing the water in this case. I even suspect CNOOC used this deal to secretly entice Chevron to sell them a piece of Unocal's Asia gas field. After all, there was rumor that they tried to bid for Unocal's asset together. We will see.