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Exxon juggles stick of dynamite near Hess deal

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Feb 27 (Reuters Breakingviews) -Exxon Mobil XOM.N and Chinese partner CNOOC 0883.HK have asserted their right to insert dynamite into Chevron’s CVX.N $53 billion deal for Hess HES.N. They claim the sale allows them to buy Hess’s crown jewel, a 30% stake in a prodigious oil field off Guyana’s coast. But for Exxon, carrying out that threat could also saddle that company with a risky time-bomb.

The field is a gem. Exxon has a 45% stake in the offshore oil block consortium, with CNOOC and Hess splitting the rest. It is slated to produce 1.2 million barrels daily in 2027, and its breakeven cost is roughly a third of Brent crude’s current price.

The dispute centers over the partners’ right of first refusal to bid for Hess’s stake. Chevron argues that is only triggered if Hess sells its stake separately; Exxon and CNOOC say a sale of Hess itself also qualifies. Chevron, which agreed to acquire Hess in October, emphatically insists on its point of view, yet warns that if it can’t come to terms with the other parties or receive a favorable result in arbitration, the merger simply will not close.

Perhaps Exxon and CNOOC want to show they take their ownership rights in Guyana seriously, or they are trying to get some kind of sweetener out of Chevron. Or perhaps they want to block the deal in hopes of later buying Hess whole – or its stake.

Exxon’s threat, though, rings somewhat hollow. The company is already buying Pioneer Natural Resources PXD.N in a $65 billion deal, including debt. Another giant transaction might cause financial indigestion. Bank of America analysts peg the value of Hess’s stake at $45 billion, and point out that the right of first refusal puts the buyer on the hook for tax on the gains. Moreover, Exxon would be increasingly concentrated in an asset that carries risks. Venezuela disputes its borders with Guyana, including the area covering these oil fields. As unlikely as it might seem, the situation could spill over. To boot, history is full of newly oil-rich countries like Guyana eventually trying to renegotiate contracts.

China’s crude imports hit a record last year, at over 11 million barrels per day, and the nation’s oil firms have appetite for scale. A bigger fount in Guyana might therefore appeal to CNOOC. But it faces many of the same hurdles as Exxon. Both partners’ stick of dynamite might be more of a damp squib.

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Chevron said in a securities filing on Feb. 26 that Exxon and Chinese oil company CNOOC have asserted they have the right to pre-empt Chevron’s acquisition of a stake in a giant offshore oil field in Guyana owned by Hess. Chevron agreed to buy Hess in October for $53 billion.

Hess owns a 30% share in a consortium to produce oil in Guyana’s Stabroek Block, alongside Exxon, which owns a 45% interest, and Chinese oil company CNOOC, which owns the remaining 25%. Chevron said the four companies have been engaged in constructive negotiations, and that “there is no possible scenario in which Exxon or CNOOC could acquire Hess’ interest in Guyana as a result of the Chevron-Hess transaction.”

In the event that its acquisition of Hess fails, Chevron may be liable for a $1.7 billion breakup fee. In its disclosure, Chevron said that an inability to resolve the situation would lead to “a failure” of the merger agreement.

Editing by Jonathan Guilford and Sharon Lam


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