ExxonMobil, Chevron, Guyana, arbitration – and what’s next for Hess deal

An arbitration case brought by ExxonMobil against the sale of Hess’ Guyana assets to Chevron is likely to delay any successful sale by at least six months, according to a filing to the Securities and Exchange Commission (SEC) by Hess on April 11.

Chevron announced the US$60 billion acquisition of Hess in October last year. A key asset in the deal is Hess’ 30% stake in the Stabroek oil block offshore Guyana.

Source: Chevron Presentation, October 23, 2023 – Available via Evaluate Energy Documents

In March, ExxonMobil filed for arbitration with the International Chamber of Commerce (ICC) in Paris, claiming the Stabroek joint operating agreement gave the firm right of first refusal (ROFR) over the sale of Hess’ Guyana assets.

ExxonMobil has since merged its arbitration claim with a similar claim brought by Chinese state oil and gas firm CNOOC — the third partner in the Stabroek oil block.

In the April 11 filing to the SEC, Hess said it still expects to complete the sale to Chevron but adds that the arbitration case may cause the transaction to be delayed from its initial expected close in the first half of 2024.

“Hess is seeking to have the merits of the arbitration heard by the third quarter of 2024 and to complete the arbitration by the end of 2024,” the SEC filing said.

“It is possible that factors outside of each party’s control could require them to complete the transaction at a later time, or not to complete it at all.”

Chevron and Hess believe that the Stabroek ROFR does not apply due to the structure of the merger and the language of the Stabroek ROFR provisions.

“We did extensive diligence on the joint operating agreement during the negotiation of the contract. We have extensive experience with these types of agreements around the world, as does Hess, and we remain very confident of our understanding of the language and look forward to seeing it affirmed in arbitration,” said Chevron CEO Mike Wirth in reported comments at the CERAWeek event in March.

Valuable assets

The Stabroek block has a low cost of supply and a low carbon intensity — two key factors for producers looking to avoid the risk of stranded assets.

The field’s low-cost phases have a breakeven cost of US$25-$35 per barrel, according to Hess.

This is significantly lower than Chevron’s current average oil price breakeven per barrel, which was in the “low $50s” in 2023, according to CFO Pierre Breber, speaking on the firm’s fourth quarter results.

Meanwhile, ExxonMobil said the Stabroek developments are among the lowest emissions intensity assets in its entire upstream portfolio. Chevron’s presentation upon deal announcement – available via Evaluate Energy Documents – also outlined the low carbon intensity of Hess’ Guyana assets as a key benefit of the merger.

The value Chevron places on the assets is clear. Evaluate Energy M&A data on costs per barrel of production and reserves show that Chevron is paying more than double the amount for Hess’ assets than the average cost of 14 other North American mergers with a similar oil-weighting that took place in 2023.

“Guyana is an exceptional and differentiated asset,” said Wirth when announcing the Hess deal.

Outcome scenarios

A number of potential outcomes are possible from the arbitration. If the outcome favors Chevron, the deal will likely go through as planned.

If the outcome favors ExxonMobil, either Chevron’s merger agreement with Hess will be cancelled and Chevron could look for growth opportunities elsewhere, or perhaps the partners in the Stabroek Block could reach a financial settlement with Chevron to allow the Hess deal to go through.

A note from analysts at RBC suggested that ExxonMobil might be attempting to negotiate more control within the joint operating agreement with the arbitration claim.

“However, we wonder whether opening up the contract for further negotiations could ultimately be a Pandora’s box, with potential for other stakeholders to look to re-negotiate terms or fiscals. All of this is uncertain at this stage,” it said.

ExxonMobil itself is in the process of a $60bn acquisition of Pioneer Natural Resources, which is expected to close around mid-year.

“It is plausible to think that moving towards arbitration could help delay the Chevron Hess transaction and allow ExxonMobil to be in a position for another major deal with Hess thereafter,” said the RBC note.

The ExxonMobil Pioneer acquisition is an all-stock transaction, but ExxonMobil could potentially fund any Hess transaction partly with cash given its “fortress balance sheet,” the note adds.

This analysis was created using:

• Evaluate Energy M&A: Our database holds every upstream deal worldwide since 2008, allowing daily comparisons of key metrics, corporate valuations, and changes in spending behavior over time. The data also includes downstream, midstream, service sector and renewable energy M&A activity. Learn more here.
• Evaluate Energy Documents: For more information, watch a short video here or click here.