News early Monday morning that American oil major Chevron was snapping up Hess and its multi-billion barrels of oil offshore Guyana came as a surprise even to those in the energy industry.
For the Bloomberg commentators it was more about trying to locate “Ghee-ana” on their mental maps. “They launch rockets there, don’t they?” asked one of them.
On the face of it the US$53B deal makes sense to both companies. It brings substantial reserves to Chevron, hungry for long-term growth and current day cash flow as well as diversifying its portfolio. For John Hess he finally gets a fair value for a company that has seen its share price go up by 97% in the past five years thanks in large part to the Stabroek Block. As he told Bloomberg Radio the market had finally narrowed the gap between Guyana’s barrels and his company’s valuation. Indeed it has taken some time for Wall St to fully appreciate the scale, quality and potential of the Guyana Basin.
Guyana crude really is the perfect product for these times: It is a low cost, high quality and versatile oil, and given the recent events in the Middle East, its proximity to the American seaboard in a relatively quiet neighbourhood adds an immeasurable geopolitical value that means the United States must have realised it needs to be protected. Cynics might add that it comes with an acquiescent government that is willing to bend over backwards even as it has failed to set up proper regulatory bodies.
Some had questioned why Chevron did not bid for any of the offshore blocks in the recent auction since their name had been bandied around for several years as an interested party. This week they got their answer. It was far simpler to buy Hess than to bid for a block and start exploration under far less favourable fiscal terms in a country whose capacity to accommo-date onshore support services is already highly constrained.
It should be noted that it is not just Guyana but Hess’ Bakken shale assets and a varied range of other operations worldwide that come with the acquisition, although Guyana really is the crown jewel in the deal with some analysts assessing it makes up 80% of the price tag. Finally Exxon being the operator must have been reassuring, what with its cost efficiencies and its ability to keep to, and actually be ahead of, deadlines.
Of course there is an interesting backstory here of history coming full circle. In 1911 John Rockefeller’s Standard Oil was broken up into 43 different companies under antitrust laws. These included Standard Oil of New Jersey (Exxon) and of New York (Mobil) as well as Standard Oil of California (SoCal) that would go on to become Chevron. In 1999, Exxon and Mobil merged to create the present day ExxonMobil. Now in Guyana, at least operationally, three of the Standard Oil descendants are collaborating. And for Hess it is the end of a 90-year journey started during the Depression when Hess’ father, Leon, began delivering oil with a second hand truck.
Putting aside sentiment, would Exxon be happy with this deal? They will likely never say, although they might be privately wondering why they didn’t think of it first. Hess was a junior partner in the Stabroek block and not one that had the massive finances or the inclination to venture outside of it. Hess’ revenues in 2022 were $11.2B. Chevron is big time with revenues of $222B last fiscal year and proven reserves of 11B barrels equivalent. In comparison Exxon had revenues of $414B and reserves also around 11BoE.
So Chevron muscling in on its prized territory might give Exxon pause for thought. More positively having a more fluid relationship with a well-resourced and technically equal partner while both companies roam the basin might make for even more discoveries and supercharge the development further. That is for those two heavyweights to sort out.
Chevron is the only American major currently producing in Venezuela although at somewhat limited levels, around 130,000 b/d. Recent develop-ments mean US sanctions look likely to be lifted in exchange for democratic concessions from the Maduro regime. That could see some raised output but nothing very significant in the short term as the infrastructure there is highly run down.
Chevron will also acquire Hess’ share in Block 42 in Suriname, right across the maritime border, from Canje meaning it will now have 66% and Shell 33%. There are plans to drill there this year. Hess also has a stake in Block 59 directly north of 42. So it would seem the opportunities for Chevron are there across three maritime zones.
Some other issues to consider: Chevron has no intention of abandoning fossil fuels. CEO Mike Wirth is very outspoken on what he sees as a strong future for traditional energy sources. He argues the transition is underway but the world economy will always run on oil and he sees his company being a big part of it. This is in contrast to the politically vulnerable European majors who are being cajoled into limiting new production even as they pile hard earned cash into less profitable renewables. To mitigate its activities, Chevron’s focus like ExxonMobil is on carbon capture and storage as the most feasible and scalable method.
Finally it remains to be seen what will be Chevron’s approach to Guyana directly. John Hess took a keen interest in the Greater Guyana Initiative with its programmes to improve health care and education, and develop the economy. Hess also committed to the purchase of US$750M in carbon credits as part of preserving the rainforest although this whole concept is increasingly being questioned. Since Hess will be appointed to Chevron’s board it may be more of a continuation.
Finally the most prescient question is whether Chevron’s arrival changes the equation regarding the border controversy. One would expect that another American major in the Guyana Basin will further fortify the United States government’s current commitment of explicitly supporting the legitimacy of the 1899 Arbitral Award, the resort to the ICJ and ultimately our territorial integrity.
