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ExxonMobil has filed for arbitration to claim rights associated with a valuable oil find off the coast of Guyana that is central to rival Chevron’s planned takeover of Hess, escalating a dispute that threatens to sink the $53bn deal.
The top US energy supermajor said on Wednesday that it had filed a case in the International Chamber of Commerce in Paris to assert its right of first refusal over Hess’s stake in the so-called Stabroek Block project in Guyana. Exxon also signalled it could make a counter offer for the assets.
Access to some of Guyana’s 11bn barrels of offshore oil was a key rationale for Chevron’s acquisition of Hess announced last year. An Exxon-led consortium discovered the Stabroek Block in 2015, catapulting the South American country into the ranks of significant oil producers.
Exxon operates the Stabroek project and owns a 45 per cent stake in it. The China National Offshore Oil Corporation owns 25 per cent, while Hess holds the remaining 30 per cent that would transfer to Chevron if the deal closes.
Exxon argues that its right to pre-empt the sale of the stake in Stabroek is baked into a joint operating agreement with Hess and Cnooc.
“We’re absolutely confident that within this contract, we have pre-emption rights, and we have filed for arbitration to make sure that we can secure those pre-emption rights,” Neil Chapman, Exxon senior vice-president, told a Morgan Stanley conference on Wednesday.
“The pre-emption rights are to give us the opportunity to look at the value, which we can then match should we choose to do so.”
The move threatens to derail what is the biggest acquisition in Chevron’s history. Chevron said last week that neither it nor Hess believed the right of first refusal applied in this instance, but warned that if an arbitration process found otherwise, the deal would not close.
In a statement on Wednesday, Chevron said: “We remain fully committed to the transaction, and are confident in our position. We look forward to closing the transaction on the terms we’ve agreed.”
Hess and Cnooc did not respond to requests for comment.
Exxon argues that it shouldered significant risks and costs in making the discovery and that it has a duty to shareholders to ensure it is rewarded.
“The reason this is important is we, along with the partners, took tremendous exploration risk, financial risk, commercial risk when we went into this joint venture,” Chapman said.
“It looks great now. It’s created great value for the country of Guyana and for the partners. But there was a risk associated. So we want to ensure that we realise the value that we’ve created,” he said, adding that arbitration of this nature tends to take five to six months.
Investors said the arbitration push by Exxon could seriously delay or torpedo Chevron’s deal to buy Hess. But they said it was difficult to assess how likely this outcome would be as the exact nature of the dispute remains unknown because the joint operating agreement has not been published.
Michael Alfaro, chief investment officer at Gallo Partners, a hedge fund focused on regulatory and policy matters across the industrials and energy sectors, said there was real reason to speculate that “cost recovery” incentives in Guyana were the dispute’s focus.
“These incentives allow operators to receive a higher cut of production in order to recover capital and operating costs on projects. Exxon may be seeking to block Chevron from obtaining these lucrative incentives, which they would receive via their planned acquisition of Hess. If successful, Exxon could see a substantial benefit in the form of higher revenues from the project.”
Exxon, in a statement following Chapman’s remarks, said: “For all those struggling to understand our position, it’s very simple: pre-emption preserves our options and there’s clear benefit to the company in that. Any company in our position would do the same thing.”
“It would be irresponsible to allow 30 per cent of a world-class operation we helped build be turned over to a third party without at least considering the exercise of our contractual rights,” the company said.
People close to Chevron said that they were not overly concerned about Exxon’s decision to file for arbitration, noting that the move was expected but ultimately they expected both parties to find a compromise.
Hess’s investors appeared to be more concerned, with the difference between the company’s current stock price and the value of Chevron’s offer continuing to widen.
Shares in Hess fell by 2.3 per cent to $143.02 following the arbitration announcement, well below the $171 a share Chevron offered to pay Hess’s shareholders in an all-stock transaction.
Chevron’s shares have slipped almost 8 per cent since the deal was announced on October 23, a drop that further hurts Hess shareholders given the all-stock nature of the offer. On Wednesday Chevron shares fell 0.8 per cent while those of Exxon climbed 1.1 per cent.
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