Sources: Exxon-Chevron dispute over Hess' Guyana asset hinges on control

Exxon Mobil Challenges Chevron's Proposed Acquisition of Hess

The fate of Chevron's $53 billion acquisition of Hess hinges on a legal dispute over whether this transaction constitutes a change of control of Hess's prized subsidiary in Guyana, according to informed sources.

Exxon Mobil and Chevron, two of the United States' largest oil companies, are embroiled in an arbitration battle centered on the world's most significant oil discovery in nearly two decades, located offshore Guyana. Exxon, which holds a 45% stake and operates all output in the Guyana consortium, disputes Chevron's attempt to acquire Hess and its 30% stake. Exxon argues that it should have been given the opportunity to purchase this stake first, asserting that a change of control in Guyana triggers a right of first refusal. Sources familiar with the confidential arguments suggest that Exxon believes Chevron structured the deal to bypass this provision.

Conversely, Chevron and Hess maintain that the acquisition would not result in a change of control since Hess would remain intact as a unit within Chevron. As such, they argue that the right of first refusal does not apply. Legal expert James English from Clark Hill Law notes that the arbitration panel must decide whether to interpret the contract language literally, which would favor Chevron, or consider the intent, potentially benefiting Exxon. If intent is scrutinized, the dispute could extend into new stages involving discovery, interrogations, and the hiring of independent valuation experts, potentially delaying a resolution until next year.

Sources indicate that Chevron views the contract language interpretation as straightforward, aiming for a hearing in the third quarter and a resolution by the fourth quarter, hoping to finalize the deal soon after. The case is particularly significant as Guyana accounts for 60-80% of the $53 billion Chevron bid for Hess.

Even if Exxon prevails in arbitration, the dispute may not end there. While Exxon has ruled out a complete acquisition of Hess, it remains open to various possibilities, including bidding for Hess's 30% stake in Guyana, negotiating for a portion of it, seeking compensation from Chevron, or leaving the current arrangement unchanged. The final strategy will depend on the valuation of Hess's Guyana stake, which remains confidential.

Oil Riches in Guyana

Guyana's oil output is projected to reach 1.9 million barrels of oil equivalent per day (boepd) over the next decade, which is more than twice the production of OPEC member Venezuela and nearly equivalent to the Gulf of Mexico, according to Rystad Energy consultancy.

Chevron initially aimed to conclude the Hess acquisition by mid-year but was surprised by Exxon's arbitration move in March, centering on the right of first refusal. Exxon CEO Darren Woods emphasizes that the initial challenge is to establish whether preemption rights within the contract exist. The arbitration panel will examine a confidential joint operation agreement (JOA) among Exxon, Hess, and the third partner, CNOOC, which governs Guyana's operations, known as the Stabroek oil block.

This JOA, drafted by Exxon in 2008 with a previous partner, is based on a 2002 model contract by the Association of International Energy Negotiators (AIEN). Though the model stipulates any "direct or indirect" change in control, the definition of "indirect" remains ambiguous. The contract's final language is undisclosed, but the 2023 update to the model contract makes an explicit reference to changes in the ultimate parent company.

Chevron and Hess have confidence in their position and anticipate a favorable arbitration outcome. However, the absence of clear precedent for Exxon's change of control argument complicates the situation. Hess has expressed disagreement with Exxon's interpretation and confidence in prevailing in arbitration.

Concluding Remarks

The ongoing arbitration between Exxon Mobil and Chevron over Hess's acquisition showcases the intricacies of contractual interpretations and industry practices concerning change of control clauses. The outcome will not only impact these oil giants but also shape the future landscape of oil production in Guyana.