Exxon-Hess arbitration panel incomplete, Hess sale to Chevron on hold

Arbitration Delay Stalls $53 Billion Hess-Chevron Deal Amid Exxon Right of First Refusal Dispute

Houston – A crucial arbitration panel that holds the power to either stop or authorize Chevron's $53 billion acquisition of Hess Corp remains incomplete three months post-filing, delaying a decision on whether Exxon Mobil has a right of first refusal over Hess' operations in Guyana. According to those familiar with the matter, the appointment of the third and final arbitrator is still pending, making it improbable for a decision to be reached this year, contrary to Hess’ prediction. This uncertainty has exerted downward pressure on Chevron’s shares, which have declined by 7.8% since the deal was announced.

In the arbitration process, each disputing side appoints one arbitrator, and those two arbitrators jointly select the third. The International Chamber of Commerce (ICC), which oversees the arbitration panel, has not provided any comments on the timeframe for appointing the third arbitrator or for resolving the dispute. Hess has stated that the arbitration is progressing and expects a decision by the end of 2024, though international arbitration timing can vary.

Market analysts are keen for a swift resolution but remain unclear on Exxon's exact objectives. According to Mark Kelly of MKP Advisors, there is widespread belief that Exxon has not communicated its intentions to either Chevron or Hess clearly. Initially, Chevron aimed to finalize the acquisition by mid-2023, but Hess shareholders approved the sale last month by a narrow 51% margin. Additionally, the U.S. Federal Trade Commission has yet to deliberate on potential antitrust issues.

The acquisition would grant Chevron a 30% stake in a vast Guyana oil consortium that has discovered at least 11 billion barrels of oil and occupies a 6.6 million-acre block, with anticipated production of 1.3 million barrels per day by 2027. Both Exxon, which owns 45% of the consortium, and CNOOC, which holds 25%, declined to estimate when the final arbitrator would be appointed. The panel will deliberate on Exxon's claim that Chevron is attempting to bypass its preemption right under the consortium’s joint operating agreement (JOA). Chevron maintains that Exxon's right does not extend to the sale of the entire Hess company.

Exxon executives emphasize the original intent behind the JOA, crafted with Shell PLC—who sold their stake before oil was found in Guyana in 2015—as a decisive factor. Exxon CEO Darren Woods has projected that the dispute could extend into 2025. According to legal experts, arbitrators should consider the intended circumstances behind contractual clauses, not just their literal wording.

In a similar case in 2017, Exxon prevailed in a right of first refusal dispute in Canada. Mohamed Amery of Linmac LLP noted that courts often look into the discussions that led to the contract clause in question. Exxon's current contracts were based on an industry model, though which specific model remains undisclosed. The valuation of Hess’s Guyana stake might influence the outcome since Exxon could price it differently from Chevron's $53 billion offer for Hess Corp.

The precise language and interpretation of the JOA, along with the valuation of the Guyana asset, will be crucial in determining the right of first refusal. As the arbitration process drags on, the market eagerly awaits a resolution to the uncertainty clouding one of the energy sector's major deals.