What an extraordinary turn of events. Chevron was all set to move in on John Hess’ oil patch down in Guyana and Boom! ExxonMobil says not so fast.
To quickly recap, back in October, Hess agreed to a takeover by Chevron in an all-stock deal worth US$53B or $171 per Hess share.
Hess’ assets include the Bakken Shale Formation in North Dakota which the company first discovered in 1951. They have projects in Malaysia and the Gulf of Mexico but the crown jewel is the Guyana basin and Hess’ 30% share of the estimated 11B barrels in the Stabroek Block. Chevron, like any oil company, is always on the hunt to secure barrels because they are literally their currency of trade and often difficult and expensive to find. So with this merger Chevron was securing a major cache of quality oil in a relatively safe part of the world to add to its 11B barrels of proven reserves.
There were some rumblings in Congress that this was part of a dangerous consolidation in the oil industry, and the Federal Trade Commission (FTC) is conducting a review of the merger for potential antitrust implications. But the deal was generally looking on track to close in the first half of 2024.
That was until Monday when Chevron warned in a filing with the Securities and Exchange Commission that if discussions and subsequent arbitration fail to set aside Exxon and China National Offshore Oil Company’s first refusal rights “the merger would not close.”
For its part Exxon stated that along with its partner CNOOC it was “considering its preemption rights in place under our joint operating agreement [JOA] to ensure we preserve our right to realise the significant value we’ve created and are entitled to in the Guyana asset.”
One can only imagine Chevron is not too happy with what one headline called this curveball and a spokesman told the trade journal Energy Intelligence on Tuesday: “We do not believe that the [right of first refusal]/preemption provision applies to the Chevron-Hess merger due to the structure of the merger and the language of the provision…There is no possible scenario in which Exxon or CNOOC could acquire Hess’ interest in Guyana as a result of the Chevron-Hess transaction.” Other lawyers also said it was rather unusual.
However, some think Exxon’s lawyers must have seen something in the language of the joint operating agreement to explore the option.
From the announcement of the merger, some had wondered how Exxon would react to Chevron buying into the block. The oil business is highly collaborative. The two companies have worked together in other parts of the world. But they are also rivals and being both progenies of Rockefeller’s Standard Oil they share the same DNA of being ruthless competitors.
If Chevron execs were at the recent expo they kept a low profile for a company about to scoop up Hess’ crown jewels.
We don’t know of course what is behind this save the speculation that both Exxon and CNOOC know there is a lot more oil in the basin and perhaps Hess had undervalued the resource. After all, it has been some time since there was a restatement of total reserves despite several discoveries. Dan Pickering, chief investment officer at Pickering Energy Partners told Reuters .
the dispute signals how valuable the Guyana projects are to Exxon: “It obviously means that 30% of Guyana is really valuable and maybe they think that Chevron is getting in too cheaply, Pickering said, adding “Right now, it feels like a food fight.”
Back when the merger was announced Chevron CEO John Wirth touched on the subject: “Some of the questions, on the one side, did you get a high enough price? On the other side, did you pay too much? There was tension in that, to be honest, during the negotiation. It, as we mentioned, has been going on for some time. John and I have been looking for a way to do a deal that is actually one that’s good for both sets of shareholders and it’s not easy because it’s a great asset and the market recognizes that value.”
MKP Advisors said in a note reviewed by Reuters that Exxon is “very possibly looking to extract a pound of flesh from Chevron to support the deal proceeding.” They speculated that “It is very possible they want greater commitments from Chevron than Hess has previously signed up to.”
There may also be concerns over the new partnership with Chevron. The existing relationship appeared to work well with John Hess taking a role in corporate responsibility initiatives and his company’s US$750M purchase of carbon credits. Perhaps the dynamics surrounding Venezuela and Chevron’s exclusive American presence are a cause for concern. What if Maduro starts squeezing Chevron’s Venezuelan operations because of this investment? One might appreciate outside of hard dollars why CNOOC and Exxon have pressed the pause button.
As it stands they have not pulled the trigger and made a formal decision to claim rights to Hess’ stake. The parties are now in talks which Chevron believes “will result in an outcome that will not delay, impede or prevent the consummation of the merger.” However, it also said the dispute could wind up in arbitration if the two sides cannot reach a settlement.
It is hard to predict how this may play out. If Exxon has gone so far already to claim they have the right of first refusal then won’t they pursue it all the way?
Another wild scenario is that Exxon, instead of pursuing this claim for Hess’s share, might go on to make a rival bid for the whole company. That would be a truly monumental battle.
For Guyana it is likely neither here nor there. But Chevron is no Hess. It is a much larger corporation with its own culture and it can be hard to predict how it will affect Guyana’s delicate political eco-system and the wider society’s lingering ambivalence towards the oil sector.
