Exxon's $60 billion fight with chevron will reshape big oil

The prize is called Stabroek — a series of oil fields off the coast of Guyana, the Latin American nation bordering Venezuela and Brazil. The potential riches are incredible — about 11 billion barrels of oil, worth nearly $1 trillion at current prices. And Stabroek is now at the centre of a legal battle that hinges on the meaning of a few words contained in a secret document, probably about 100 pages long. The outcome will reshape Big Oil.

ExxonMobil Corp. owns a large chunk of Stabroek, having been part of the consortium that found oil there in 2015. Chevron Corp. is now trying to muscle in, after announcing a deal in October to buy Hess Corp. in an all-stock transaction worth $60 billion, including debt. Hess is a partner in Stabroek, owning 30% of the block. Exxon is the operator, controlling 45%, and Chinese state-owned giant CNOOC Ltd. owns the remaining 25%.

Chevron Is Gaining a 30% Stake in Guyana's Stabroek Block

Hess deal would give Chevron 30% ownership of over 11 billion barrels of oil equivalent

The Hess deal would give Chevron access to the Stabroek oil riches, transforming its long-term prospects. But arch-rival Exxon has sued to block it, trying to open the door to control an even larger share of the oil riches and beef up its leadership position among Big Oil. Veteran oil investors could be forgiven for having a case of déjà vu; in the 1980s, one of the forerunners of Chevron — Texaco — went bankrupt after losing a $10 billion landmark legal fight involving the acquisition of another company. While the current dispute is quite different, its outcome will be as consequential as the one four decades ago.

Eyes on the prize. Photo: Bloomberg

Soon after the Chevron-Hess transaction was announced, Exxon sounded welcoming. "We work with Chevron all around the world," Exxon Chief Executive Officer Darren Woods told Bloomberg Television on Oct. 27. "I see them, their participation basically coming in and supporting the work that we've already demonstrated our ability to deliver on."

But two weeks later, Woods called his counterparts at Hess and Chevron to say there was a problem. Exxon argued that it had a right of first refusal on Hess's stake in Guyana; Hess and Chevron responded by saying while that would typically be true, the structure of their deal negated that claim.

The dispute remained secret for four months as the parties tried to reach a face-saving deal. It became public on March 28 when Chevron filed a document known as an S-4 with the US Securities and Exchange Commission, detailing the deal and Exxon's concerns. Days later, Woods informed Hess CEO John Hess and Chevron CEO Mike Wirth that his company was suing for arbitration.

Oil companies typically share the risks of operating in frontier countries like Guyana once was, never owning 100% of a project. To detail their rights and obligations to each other and their projects, they write confidential contracts called joint operating agreements. While the exact JOA details remain secret, we can infer the outlines because the lawyers wrote it using an industry template as the starting point — the 94-page-long 2002 Association of International Energy Negotiators model contract, the contents of which hasn't previously been reported, nor has its use as the basis of the Stabroek agreement. Exxon and Chevron declined to comment on the record for this column.

Exxon has repeatedly said that because it drafted the JOA, it knows better than others the purpose behind every clause. Neil Chapman, one of the company's four top executives, said March 6: "We understand the intent of this language of the whole contract because we wrote it." I'm sceptical about how important that is; intention is all very well, but what matters under English law is what the contract states, rather than what someone claims it was meant to say.

Wall Street has taken the view that Exxon won't win, because a corporate deal at the parent level typically doesn't trigger pre-emption rights at the asset level. But here's a paragraph from the template that, if it's in the Stabroek JOA as is likely, might prove Exxon has a case:

"Change in Control" means any direct or indirect change in Control of a Party (whether through merger, sale of shares or other equity interests, or otherwise) […] in which the market value of the Party's Participating Interest represents more than ____ percent (__%) of the aggregate market value of the assets of such Party and its Affiliates that are subject to the change in Control. For the purposes of this definition, market value shall be determined based upon the amount in cash a willing buyer would pay a willing seller in an arm's length transaction."

The percentage is blank on the model contract, and we don't know what number was used in the Stabroek JOA. But we know that analysts reckon most of Hess's value derives from its Guyana assets. Paul Sankey, a veteran oil analyst who runs his own research firm, says that of the about $170 per share that Chevron is paying for Hess, roughly $140 comes from the stake in the Guayana oil block. That's perhaps Exxon's strongest argument, and why the company focuses on the intention of the JOA.

But the model contract also talks about the "amount in cash," and we know the Chevron deal is an all-stock acquisition. The implications of that are unclear.

Chevron has also a potentially important argument in its favour. The model contract indicates that pre-emption rights may not be triggered in some cases, particularly when control of the asset remains with an affiliate:

"Any Change in Control of a Party, other than one which results in ongoing Control by an Affiliate, shall be subject to the following procedure. For purposes of this Article 12.3, the term "acquired Party" shall refer to the Party that is subject to a Change in Control and the term "acquiror" shall refer to the Party or third party proposing to acquire Control in a Change in Control."

Chevron acknowledges the right of first refusal ingrained in the JOA, but says it "does not apply to the merger due to the structure of the merger" and the "language" of the Stabroek right of first refusal. Probably Chevron is referring to the above clause, and the "ongoing control by an affiliate" wording. So the definition of what an "affiliate" is could prove key. If I'm right, a $60 billion deal could effectively depend on the meaning of a single word. That's the stuff of dreams for lawyers.

Chevron has said that if Exxon prevails in arbitration, it won't purchase Hess. That, in turn, would stop Exxon from claiming any of the Hess assets. Exxon, meantime, isn't revealing its hand; it's definitely suing for arbitration, but keeping its options open if it wins. The case will be heard at the International Chamber of Commerce in Paris, and is likely to take anywhere between six and 12 months to resolve, although proceedings could take even longer.

Without access to the actual JOA document, which neither party has made public, we can only theorise about the legal arguments and potential outcomes based on the template the companies used to write it. But one thing is clear: it's a nasty fight — one that will remake either of the participants. If Chevron wins, it would secure an expansion of its production beyond the US and its prized assets in Australia and Kazakhstan, helping to boost its valuation. But if Exxon prevails and finds a way to increase its stake in Guyana, it would consolidate its dominance over what many in the industry consider the most significant oil discovery of the last 25 years. For the future of Big Oil, there's a lot at stake.