The potential cash transaction between Exxon and Chevron is contingent upon a change in the control of Hess' Guyana asset, according to reliable sources.
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Two prominent U.S. oil companies, Exxon and Chevron, are
engaged in an arbitration dispute concerning the largest offshore oil discovery
in Guyana in nearly two decades. Exxon, which holds a significant 45% stake and
operates all production in the South American nation, has formally challenged
the proposed merger between Chevron and Hess, which would result in Chevron
acquiring control of Hess’s 30% stake. This transaction is considered crucial
for Chevron’s future trajectory.
Exxon asserts that Hess should have first provided it the
opportunity to acquire its interest in the Guyana asset.
Exxon asserts that the right of first refusal is triggered
by a change in control in Guyana and alleges that Chevron structured the
transaction to circumvent this right, as shared by individuals familiar with
the confidential arguments.
Chevron and Hess announce that the acquisition is structured
to preserve Hess’s autonomy, ensuring no alterations to its asset control in
Guyana. Hess will operate as a distinct unit within Chevron.
Chevron and Hess maintain that the argument lacks merit as
Hess would persist under a new Chevron and retain ownership of the asset,
according to individuals familiar with their perspective.
“The crux here is whether a change of control even occurred,”
agreed oil and M&A expert James English at law firm Clark Hill Law.
The three-person arbitration panel tasked with making the
decision must determine whether to prioritize the contractual language or delve
into Chevron’s underlying intentions.
Chevron and Hess maintain that the argument lacks merit as
Hess would persist under a new Chevron and retain ownership of the asset,
according to individuals familiar with their perspective.
“The crux here is whether a change of control even occurred,”
agreed oil and M&A expert James English at law firm Clark Hill Law.
The three-person arbitration panel tasked with making the
decision must determine whether to prioritize the language outlined in the
contract or delve into Chevron’s underlying intentions.
“A plain language approach would be very favorable to
Chevron, while if you go with the intent, Exxon may have a case,” English said.
A discussion about intent would also advance the dispute
into new phases that could necessitate discovery, interrogations, and the
hiring of independent valuation experts, potentially delaying a resolution
until next year, as Exxon has cautioned.
Chevron believes the discussion on how to interpret the
words in the contract will be “very straightforward,” a person aware of the
company’s legal strategy said. Chevron and Hess said they are seeking a hearing
in the third quarter, hoping for an outcome in the fourth and to close the deal
shortly thereafter.
The case is distinctive because Guyana accounts for a
substantial portion, estimated to be between 60% and 80%, of the $53 billion
offered by Chevron for Hess, as per the evaluations of English and other
industry specialists.
An arbitration win for Exxon would not conclude the dispute.
While Exxon has eliminated the possibility of acquiring Hess in its entirety,
it has indicated its willingness to consider bidding for Hess’s 30% stake in
Guyana, bidding for a portion of that stake, seeking compensation from Chevron,
or maintaining the current situation.
The ultimate strategy will hinge on a closely guarded secret
by Chevron and Hess: the valuation of Hess’ Guyana stake in the merger.
OIL RICHES
Guyana is projected to produce 1.9 million barrels of oil
equivalent per day (boepd) in the upcoming decade, surpassing the production of
Venezuela, an OPEC member, and approaching the production levels of the Gulf of
Mexico, according to Rystad Energy, a reputable consulting firm in the energy
sector.
Chevron initially anticipated the completion of the Hess
acquisition within the first half of the current year. However, in March, the
company encountered an unexpected development when Exxon initiated arbitration
proceedings asserting their right of first refusal.
“Job number one is to get past the first hurdle, which is an
alignment that a preemption rights exist in the contract,” Exxon CEO Darren
Woods told Reuters in March.
The arbitr”tion panel will examine a confidential joint
operating agreement (JOA) between Exxon, Hess, and a third partner, CNOOC, that
governs the Guyana operations, specifically the Stabroek oil block.
The Joint Operating Agreement (JOA) was drafted by Exxon in
2008, prior to any oil discoveries, in collaboration with a former partner. The
JOA was based on a model contract developed in 2002 by the Association of
International Energy Negotiators (AIEN), as confirmed by two individuals
familiar with the matter.
The model states that any "direct or indirect” change
in control would constitute a change in control, but it does not clearly define
what is meant by “indirect.”
The contract's language has been modified. However, Exxon,
Chevron, and Hess have declined to disclose the final contract language.
The 2023 model update clarifies that a change in the
ultimate parent company constitutes a change in control.
“We wrote the JOA, so we have a pretty clear line of slightness
(sic) to the intent and the circumstances that apply,” Woods said in April
after reporting first quarter earnings. “That is the point of the arbitration.”
The individual with insight into Chevron's strategy
mentioned that there is no tangible precedent for Exxon's change of control
arguments in decades of industry mergers and acquisitions governed by similar
JOAs.
“We disagree with Exxon Mobil’s interpretation of the agreement and are confident that our position will prevail in arbitration,” Hess said. Reuters