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On August 4, the entire board of China National Offshore Oil Corp. (CNOOC), the Chinese oil company that had tried to make history by buying Unocal, the eighth-largest oil company in the U.S., gathered at its Beijing headquarters for a postmortem. Thirty-six hours earlier, the company's CEO, Fu Chengyu, had made it official: after fencing with Chevron, the U.S.-based "super major'' oil company, for the right to buy Unocal and its extensive oil and gas assets in Asia, CNOOC was giving up the fight. The Chinese firm had been spooked both by political opposition in the U.S. Congress, and the steep price the company would have to pay to win a bidding war against one of the world's oil giants.

The mood in the room, according to someone briefed about the session later, was one of resignation and, at least on Fu's part, some disappointment. He had pursued Unocal zealously since late last year. Just days before the meeting in Beijing, TIME has learned, his investment bankers were still pushing him to up the ante, in hope of knocking Chevron out of the game. Fu, backed by his board, demurred. The potentially historic merger—"one that everyone involved with would have told their grandkids about had it come off," says one board member—had become, as an adviser to the CEO put it, "the deal from hell." Now, at least, the deal from hell was over.

In CNOOC's run at Unocal, no one had exactly covered themselves in glory. Fu, the personable CEO who had gone to graduate school in Los Angeles near Unocal's headquarters, had taken a pratfall right out of the gate back in late March, failing to inform his board members about the bid until just two days before he was going to launch it. When virtually the entire eight-member board—and not, as earlier reports had it, just the outside directors—balked, Fu had to back off. That allowed Chevron to make the first bid, and forced CNOOC to play catch-up all summer. Meanwhile, Chevron vice-chairman Peter Robertson, who had given a fawning speech in Beijing about his company's great "faith in China" last October (not surprisingly, given the company's extensive business ties to China), turned around and complained publicly about the Chinese government subsidizing CNOOC's bid.

Once CNOOC had bid $18.5 billion for Unocal, topping Chevron's offer, the action quickly shifted to Washington. There, egged on by Chevron's lobbyists, Congress raised a series of objections to the deal, particularly noting supposed security risks for the U.S. in a CNOOC-Unocal marriage. Most energy experts believe that the risks either didn't exist, or could easily have been dealt with. "There are no security issues—none," oil consultant Philip Verleger said earlier this summer. It was the congressional opposition that CNOOC's advisors—all American, all very experienced, and all very well paid—didn't expect, and it came with a ferocity that took everyone by surprise. In late July, Congressmen managed to get an amendment tacked on to an energy bill that U.S. President George W. Bush desperately wanted to sign, adding four additional months of regulatory scrutiny to a CNOOC bid. "It was that political opposition which tipped the balance, even more than the economics of the deal," says one banker on CNOOC's team.

In piecing together what went wrong, there is plenty of blame to go around. At various times over the past three months, CNOOC, the Chinese government (which owns 70% of the company), and the company's gold-plated U.S. advisers—investment banks Goldman Sachs and JP Morgan, as well as high-powered Washington, D.C., law firm Akin Gump Strauss Hauer Feld LLP—all made bewildering, tone-deaf mistakes that hurt CNOOC's case. The oil company's Washington team, sources close to the deal say, consistently reassured management that the politics were manageable—even as the political climate deteriorated throughout the summer.

On June 30 Congress, trying to gum up the regulatory process, overwhelmingly passed a resolution preventing the U.S. Treasury from spending any money to "approve" CNOOC's bid. In response, a Chinese Foreign Ministry spokesman—representing a government elected by no one—felt compelled to say publicly that Congress should butt out. Economic tensions with China were already front and center for many Congressmen, obsessed as they have been all year with China's surging trade surplus and a currency that was not revalued until July 21, and the Foreign Ministry did CNOOC no favors in Washington by weighing in. "For [them] to declare that Congress ought to get out of the issue [was] just totally naive, and absolutely inflamed the Congress," says C. Richard D'Amato, chairman of the U.S.-China Economic and Security Review Commission. The White House, meanwhile, stayed pretty much silent about the issue throughout.

Sometimes CNOOC's high-paid bankers were no more helpful than its Beltway advisers. Two principal lines of attack for Chevron's allies were that the CNOOC bid was effectively subsidized by sweetheart loans from the government, and that there was no "level playing field"—that is to say, a U.S. energy company could not acquire one of its competitors in China. Both points were, in fact, true. But earlier this summer leaks began appearing in the financial press—and word was spread around Washington—that there wasn't "one dime of [Chinese] government money" involved in the deal, as one of CNOOC's advisers said to TIME in June. A CNOOC source who was trying to make the deal happen said this argument was "simply preposterous. I mean, it just wasn't true. But for three weeks this was the line. And every time someone would say it, I'd be talking to some Senator or Congressman and his opposition to [the deal] would only increase.''

Still, it took a while, one CNOOC board member says, for "reality to impinge." As late as three weeks ago, Fu and his bankers were still gung-ho, preparing to bid between $72 and $73 per share for Unocal—up from their initial $67 offer. Then, on July 19, came word that CNOOC's largest private shareholder, investment firm William Blair & Co. in Chicago, was dumping its entire stake in CNOOC—$141 million—fearful that Fu would overpay for Unocal. "We're not in favor of the bid," said David Merjan, a fund manager at the firm.

That, says one source close to the CEO, "got Fu's attention, absolutely." For all the efforts of those opposed to CNOOC to portray it as part of a government monolith immune to commercial pressures, Fu and his managers have run one of the most transparent—and shareholder-friendly—companies in the new China. It stung when the largest private shareholder dumped its stake and publicly decried the possibility of a deal. Facts on the ground were piling up, and soon Fu began to prepare his retreat.

From the outset, one of the mysteries surrounding CNOOC's bid was the precise nature of Beijing's role in it. Fu always insisted that the Chinese government had no involvement, but that, to many observers, seemed implausible. Chinese energy companies have been scouring the globe for resources under the government's "go out" policy. One source close to CNOOC's top management believes the government "tolerated" the bid. But once it became clear that CNOOC's ambitions had become a flash point in an already tense relationship with the U.S., whatever enthusiasm there was began to wane. In mid-July, Beijing's Xinhua news agency opined that, in the future, perhaps it would be best if Chinese companies did "friendly" mergers with foreign companies. Later the Chinese media docilely parroted the government line, which was that whatever happened to the deal, U.S.-China trade relations would continue to benefit both countries. That was a sign, says this source, that even in government circles, the winds were shifting against CNOOC.

Unocal's board had, on July 21, reaffirmed its commitment to Chevron after its CEO, David O'Reilly, had sweetened his offer. On August 10, Unocal's shareholders were to choose between the two suitors. Rather than increase his bid, as his bankers urged, Fu folded. By the end of the August 4 meeting with his board in Beijing, the mood had lightened somewhat. "You got the sense that we were at least beginning to look at this whole episode in a slightly different way," says one participant. Already, there is speculation in the markets about who else the Chinese company might target for an acquisition. As he licked his wounds in Beijing, one thing should certainly have bucked up Fu. Once the speculation that CNOOC might pull out of the bidding rolled around international markets, the company's stock started to rise sharply. By August 5, CNOOC's U.S.-traded shares were at $69, compared to $55 in mid-June. From the start, Fu had always insisted that the Unocal bid had been about increasing "shareholder value." Here's the irony: not buying the U.S. firm might turn out to be the smartest move he could have made.

• Bill Powell | Shanghai
• Swamped by opposition among U.S. politicians, CNOOC finally drops its bid for Unocal—and may be better for it