Exxon Mobil Corp. yesterday filed for arbitration to retain its preemption rights over Hess Corp.’s stake in a giant offshore oil development in Guyana, threatening Chevron Corp.’s US$53 billion deal to buy into the field, Bloomberg reported.
Exxon filed for arbitration yesterday morning in the International Chamber of Commerce in Paris, senior vice president Neil Chapman said at a conference hosted by Morgan Stanley. Chevron’s deal to buy Hess amounts to circumventing Exxon’s pre-emption rights, Chapman said.
Reuters had last week reported that ExxonMobil had said it may exercise pre-emptive rights that could block Chevron from acquiring a 30% stake in a giant Guyana oil block, the centerpiece of its rival’s US$53 billion deal to buy Hess.
The largest U.S. oil producer’s aim could be to get Chevron to raise its commitments to the capital-intensive Stabroek block, which contains at least 11 billion barrels of oil, or to make some other concession elsewhere, analysts and investors said, according to Reuters.
The two largest U.S. oil producers are both rivals and partners in projects around the world.
Exxon is “very possibly looking to extract a pound of flesh from Chevron to support the deal proceeding,” MKP Advisors said in a note. “It is very possible they want greater commitments from Chevron than Hess has previously signed up to”, Reuters reported.
Exxon operates all production in Guyana with a 45% stake in the consortium and Hess and China’s CNOOC as its minority partners.
Exxon and CNOOC believe the right of first refusal applies, the U.S oil producer said in a statement, as they owed it to their investors and partners “to realize the significant value we’ve created and are entitled to in the Guyana asset.”
Yesterday, the UK’s Financial Times (FT) said that Exxon also signalled it could make a counter offer for the assets. Access to some of Guyana’s 11bn barrels of offshore oil was a key rationale for Chevron’s acquisition of Hess announced last year, it said. Exxon argues that its right to pre-empt the sale of the stake in Stabroek is inscribed into a joint operating agreement with Hess and CNOOC.
“We’re absolutely confident that within this contract, we have pre-emption rights, and we have filed for arbitration to make sure that we can secure those pre-emption rights,” Neil Chapman, Exxon senior vice-president, told a Morgan Stanley conference yesterday, according to the FT.
“The pre-emption rights are to give us the opportunity to look at the value, which we can then match should we choose to do so.”
The FT said that the move threatens to derail what is the biggest acquisition in Chevron’s history. Chevron said last week that neither it nor Hess believed the right of first refusal applied in this instance, but warned that if an arbitration process found otherwise, the deal would not close. In a statement yesterday, Chevron said: “We remain fully committed to the transaction, and are confident in our position. We look forward to closing the transaction on the terms we’ve agreed.”
The FT said that Exxon argues that it shouldered significant risks and costs in making the discovery and that it has a duty to shareholders to ensure it is rewarded. “The reason this is important is we, along with the partners, took tremendous exploration risk, financial risk, commercial risk when we went into this joint venture,” Chapman said.
“It looks great now. It’s created great value for the country of Guyana and for the partners. But there was a risk associated. So we want to ensure that we realise the value that we’ve created,” he said, adding that arbitration of this nature tends to take five to six months.
According to the FT, investors said the arbitration push by Exxon could seriously delay or scuttle Chevron’s deal to buy Hess. But they said it was difficult to assess how likely this outcome would be as the exact nature of the dispute remains unknown because the joint operating agreement has not been published.
Michael Alfaro, chief investment officer at Gallo Partners, a hedge fund focused on regulatory and policy matters across the industrials and energy sectors, told the FT that there was real reason to speculate that “cost recovery” incentives in Guyana were the dispute’s focus. “These incentives allow operators to receive a higher cut of production in order to recover capital and operating costs on projects. Exxon may be seeking to block Chevron from obtaining these lucrative incentives, which they would receive via their planned acquisition of Hess. If successful, Exxon could see a substantial benefit in the form of higher revenues from the project.”
Exxon, in a statement following Chapman’s remarks, said: “For all those struggling to understand our position, it’s very simple: pre-emption preserves our options and there’s clear benefit to the company in that. Any company in our position would do the same thing.” “It would be irresponsible to allow 30 per cent of a world-class operation we helped build be turned over to a third party without at least considering the exercise of our contractual rights,” the company said.
People close to Chevron said that they were not overly concerned about Exxon’s decision to file for arbitration, noting that the move was expected but ultimately they expected both parties to find a compromise, the FT reported. Hess’s investors appeared to be more concerned, with the difference between the company’s current stock price and the value of Chevron’s offer continuing to grow. Shares in Hess fell by 2.3 per cent to US$143.02 following the arbitration announcement, well below the US$171 a share Chevron offered to pay Hess’s shareholders in an all-stock transaction, the FT said. Chevron’s shares have fallen almost 8 per cent since the deal was announced on October 23, a drop that further hurts Hess shareholders given the all-stock nature of the offer. On Wednesday Chevron shares fell 0.8 per cent while those of Exxon rose 1.1 per cent.
