Chevron Corporation, the second-largest U.S. oil company, has made a bold move to acquire Hess Corporation, a rival oil producer with a stake in the lucrative Guyana offshore oil field. But the deal, valued at $53 billion, is not without challenges.
Exxon’s arbitration claim
The main obstacle is Exxon Mobil, the largest U.S. oil company and the operator of the Guyana project. Exxon has filed an arbitration claim against Hess, alleging that it has the right of first refusal to buy Hess’s 30% share of the consortium that has discovered more than 11 billion barrels of oil in the Stabroek block.
Exxon claims that the operating agreement governing the group, which also includes China’s CNOOC, gives it the option to match any offer for Hess’s Guyana assets. They has left open the possibility of a negotiated settlement, but also said it would consider exercising its preemption right if Chevron pursues its bid.
The dispute could delay or derail Chevron’s goal of closing the deal by mid-2024, or force Chevron to pay Exxon to drop its claim. Chevron’s CEO Michael Wirth, who is known for his calm demeanor and long-term vision, declined to comment on the arbitration, but said the company remains “fully committed to the transaction, and is confident in our position.”
Venezuela’s border dispute
Another challenge for Chevron is the geopolitical risk of operating in Guyana, a small South American country that is locked in a century-old border dispute with its neighbor Venezuela. Venezuela’s President Nicolas Maduro has threatened to take over Guyana’s oil fields by force, and has sent troops and warships to the contested area.
Chevron is in a delicate position, as it is the only U.S. oil company that still operates in Venezuela, despite the U.S. sanctions imposed on the OPEC nation since 2019. Chevron has managed to keep its properties there amid years of hyperinflation and political turmoil, but it could face a new dilemma if the sanctions are reinstated.
Analysts say that Chevron will have to tread carefully and avoid taking sides in the conflict, while also ensuring the security of its operations and personnel. Chevron may also have to deal with the environmental and social impacts of the oil boom in Guyana, which is expected to transform the country’s economy and society.
A legacy-maker for Wirth
Despite the challenges, the acquisition of Hess could be a legacy-maker for Wirth, who took over as Chevron’s CEO in 2018. The deal would boost Chevron’s production and cash flow growth, and diversify its portfolio with world-class assets.
The Guyana project is one of the most attractive in the industry, with low costs, high margins, and low carbon intensity. It is expected to deliver up to 1.6 million barrels of oil per day by 2030, making Guyana one of the world’s top oil producers. Hess’s Bakken assets in North Dakota would also add another leading U.S. shale position to Chevron’s operations in Colorado and Texas.
Wirth has won praise for his disciplined approach to capital allocation and shareholder returns. He walked away from a bidding war for Anadarko Petroleum in 2019, and then made a series of smaller deals to expand Chevron’s reserves. He also raised Chevron’s dividend and share buybacks, and pledged to reduce the company’s carbon emissions.
If Wirth can overcome the hurdles and close the deal with Hess, he will cement his reputation as one of the most successful leaders in the oil industry.
Source: Reuters
