Exxon Raises Questions About Chevron’s $53 Billion Deal for Hess
America’s two largest energy companies, Exxon Mobil and Chevron, are jousting over a prized new source of oil in the waters off Guyana, in Latin America.
The conflict is creating doubts over Chevron’s bid to acquire Hess for $53 billion, announced in October. Chevron this week warned of the possibility that “the merger would not close” because of the dispute.
At the heart of the deal is Hess’s investment in Guyana, where an Exxon-led group has discovered 11 billion barrels of oil and gas in an area known as the Stabroek block. With just 800,000 people, Guyana, long one of Latin America’s poorest countries, is now being compared to Qatar, the natural-gas-rich Persian Gulf emirate.
Exxon has raised concerns over Chevron’s effort to gain entry to this petroleum bonanza through a proposed purchase of Hess’s 30 percent stake in Stabroek. Under the agreements governing the block, Exxon may be entitled to a right of first refusal — known in industry jargon as pre-emption — that partners in the development share over any stake sold. Exxon owns 45 percent of Stabroek and is the operator or manager of the area. The third partner in Stabroek is CNOOC, a large Chinese energy company.
Exxon seems to believe that it should be rewarded for the financial risks it has taken in developing Guyana’s oil resources and the technological contributions it has brought to the country.
“We owe it to our investors and partners to consider our pre-emption rights in place under our Joint Operating Agreement to ensure we preserve our right to realize the significant value we’ve created and are entitled to in the Guyana asset,” Exxon said in a statement.
Chevron said in a securities filing that the companies had been engaged in what it called “constructive discussions” on the situation and said it believed the talks would lead to an outcome that would allow its merger with Hess to proceed. However, Chevron warned that if the talks did not “result in an acceptable resolution,” the deal might be called off.
But Chevron stressed that there was “no possible scenario” in which Exxon could acquire the Hess position. If the merger failed, Hess would go on operating as an independent company, Chevron said.
In its statement, Chevron said that it did not dispute the existence of the so-called pre-emption rights, but that the company believed the legal structure of the Hess purchase meant it did not apply.
The skirmishing demonstrates Guyana’s coveted status in the oil industry. It is one of a handful of countries, including the United States and Brazil, whose output growth is expected to keep the Organization of the Petroleum Exporting Countries on the defensive.
Guyana is in the early stages of a rapid ramp-up. Chevron said Hess’s share of production was about 110,000 barrels a day, but according to analysts’ projections that amount could quickly grow by several fold.
The potential wealth has already attracted the unwelcome attention of neighboring Venezuela, which has revived old claims to a vast portion of Guyana. Venezuela’s economy has collapsed amid political turmoil that has also sharply reduced its own oil output.
It is not hard to understand Exxon’s interest. Acquiring the Hess stake “makes sense” because it would give the American company an even larger share of “a highly prized asset” that it is already managing, said Biraj Borkhataria, an analyst at RBC Capital Markets, in a research note on Tuesday. Mr. Borkhataria noted, however, that Exxon would have even more exposure to a country “that is already party to a potential border dispute.”
Because Chevron agreed to pay what was considered a high price for Hess, investors might initially welcome the company’s walking away, Mr. Borkhataria said. Hess shares would most likely take the biggest hit, with Chevron having agreed to pay a roughly 10 percent premium.
Hess shares fell 3.5 percent on Tuesday.
