By Sabrina Valle
HOUSTON (Reuters) – ExxonMobil (NYSE:)’s legal attempt to quit Chevron (NYSE:)’s proposed $53 billion acquisition of Hess (NYSE:) hinges on whether the transaction would involve a change of control over Hess’s subsidiary in Guyana, according to people with knowledge of the argument .
The two largest oil producers in the US are locked in an arbitration battle over the world’s biggest oil discovery in nearly two decades, offshore Guyana. Exxon, which operates all production in the South American country with a 45% stake in a lucrative consortium, has challenged the merger that would give Chevron control of Hess and its 30% stake, a deal that could threaten Chevron’s future determine.
Exxon claims Hess should have first given it the opportunity to buy its stake in the Guyana asset.
Exxon’s position is that the right of first refusal is triggered by a change of control in Guyana and that Chevron structured the deal in a way that could circumvent it, say people familiar with the arguments, which are confidential.
Chevron and Hess say the acquisition is structured to leave Hess intact, without changing control of its assets in Guyana, as Hess would become a unit within Chevron.
Chevron and Hess believe the argument has no merit because Hess would survive under a new Chevron and continue to own the asset, people close to their thinking said.
“The crux here is whether there has been a change of control at all,” agreed oil and mergers and acquisitions expert James English of law firm Clark Hill Law.
The three-member arbitration panel that will make the call will have to decide, in part, whether to focus on the language in the contract or delve into Chevron’s intentions.
“A plain language approach would be very beneficial to Chevron, whereas if you follow the intent, Exxon might have a case,” English said.
A discussion of intent would also push the dispute into new phases that could require discovery, interrogations and the hiring of independent valuation experts, meaning a resolution could not be reached until next year, as Exxon has warned.
Chevron believes the discussion over how to interpret the words in the contract will be “very simple,” said a person familiar with the company’s legal strategy. Chevron and Hess said they are looking for a hearing in the third quarter, hoping for an outcome in the fourth quarter and will close the deal shortly thereafter.
The case is unique because Guyana represents between 60 and 80% of the $53 billion Chevron offered for Hess, English and other experts estimate.
A victory in Exxon’s arbitration would not mean the end of the dispute. While Exxon has ruled out acquiring Hess outright, it has left the door open to bid for its 30% stake in Guyana, to bid for only a portion of it, to get compensation from Chevron, or to keep the business just leave them as they are.
The ultimate strategy will depend on what has so far been a closely guarded secret between Chevron and Hess: how much their merger is worth Hess’ stake in Guyana.
OIL REALM
Guyana will produce 1.9 million barrels of oil equivalent per day (boepd) over the next decade, more than twice the output of OPEC member Venezuela and almost as much as the Gulf of Mexico, consultancy Rystad Energy predicts.
Chevron originally hoped to complete the Hess acquisition in the first half of this year, but was surprised in March when Exxon sought arbitration over the right of first refusal.
“Task number one is to get past the first hurdle, which is an alignment that there is a right of first refusal in the contract,” Exxon CEO Darren Woods told Reuters in March.
The arbitration panel will analyze a confidential joint operations agreement (JOA) between Exxon, Hess and a third partner, CNOOC (NYSE:), which controls the Guyana operations known as the Stabroek oil block.
Exxon wrote the JOA in 2008 with a previous partner, before any oil discoveries, based on a 2002 model contract from the Association of International Energy Negotiators (AIEN), two of the people said.
For example, the model says that any ‘direct or indirect’ change in control would imply a change in control, but it is not entirely clear what indirect means.
However, the model language has been adjusted. Exxon, Chevron and Hess declined to disclose the final language of the contract.
The model was updated in 2023 to make explicit that there is a change of control if the ultimate parent company changes.
“We wrote the JOA, so we have a pretty clear view of the intent and the circumstances that apply,” Woods said in April after reporting first-quarter earnings. “That’s the point of the arbitration.”
The person briefed on Chevron’s strategy said there is no real precedent for Exxon’s arguments for taking control in decades of industry mergers and acquisitions under similar JOAs.
“We disagree with Exxon Mobil’s interpretation of the agreement and are confident that our position will prevail in the arbitration,” Hess said.
