Exxon Guyana Slap at Chevron Highlights Supply Security Importance

• Without Guyana, there would be little point to the tie-up between Hess and Chevron.
• Exxon said its partnership terms with Hess Corp. give it—and their third partner, Chinese CNOOC—the right of first refusal to the acquisition of Hess Corp.'s stake in the Stabroek Block.
• It makes perfect sense that Exxon would fight for a bigger share of the Guyanese pie to secure higher future profits when the deficit materializes.

When Chevron announced it had struck a deal to acquire Hess Corp. for $53 billion last year, it was seen as yet another move by a supermajor to secure future oil supply at reasonable production cost.

Just how important securing this supply is not only for Chevron but for its peers became clear last week, when Exxon surprised many with the warning that it could make the deal meaningless by exercising a right of first refusal stipulation in its Guyana partnership with Hess Corp.

Without Guyana, Chevron has signaled, there would be little point to the tie-up—despite Hess's interests in the Permian and elsewhere in the shale patch.

On Monday, Exxon said its partnership terms with Hess Corp. give it—and their third partner, Chinese CNOOC—the right of first refusal to the acquisition of Hess Corp.'s stake in the Stabroek Block. This is the patch of offshore acreage where the consortium has made a string of more than a dozen discoveries, tapping an estimated 11 billion barrels and counting.

The announcement came as a surprise to many who appear to have assumed that Exxon would make no trouble for Chevron in its attempt to take over Hess's 30% interest in Guyanese offshore oil. In fact, it should not have been that surprising.

In just a few short years, Guyana has emerged as possibly the hottest spot in global oil besides the Permian. The nation of fewer than a million people is believed to be sitting on oil resources worth over half a trillion dollars.

Right now, Guyana produces some 400,000 barrels of oil daily, all from wells drilled by the Exxon-led consortium in the Stabroek Block. The plan is to extend this to 1.2 million barrels daily in the next three to four years. That level of production would put Guyana ahead of some OPEC producers. Related: This Could Be A Gamechanger For Natural Gas In Europe

These expansion plans seem counterintuitive for those following oil demand forecasts from the International Energy Agency. According to its latest, oil demand is about to peak around the same time that Guyana's oil production surpasses 1 million bpd. Exxon and Chevron appear to disagree, with both prioritizing Guyana as a destination for future investments.

This comes at a time when the reserve replacement ratio in global oil is at a dismal rate that could see the market swing into a deficit as soon as 2025, according to Occidental's CEO Vicky Hollub.

"We're in a situation now where in a couple of years' time we're going to be very short on supply," Hollub said earlier this month.

In such a context, it makes perfect sense that Exxon would fight for a bigger share of the Guyanese pie to secure higher future profits when the deficit materializes. But it also makes sense to use the threat as a way of making Chevron share the investment load for the Guyanese projects.

This is what some analysts believe is happening. Exxon was "very possibly looking to extract a pound of flesh from Chevron to support the deal proceeding," analysts from MKP Advisors said in a note, quoted by Reuters. "It is very possible they want greater commitments from Chevron than Hess has previously signed up to."

It is a very interesting situation in which it appears difficult to say who's right and who's wrong. Per Exxon, a right of first refusal applies to Hess's stake in the Stabroek Block. Per Chevron and Hess itself, it does not apply because the deal with Chevron is for the whole company and not only for its Guyanese assets.

The case is quite complicated, it seems, and it could end in more than two ways, with some predicting that Exxon might end up buying Hess instead of Chevron.

While these developments and speculation make for some light entertainment for observers, the importance of the Guyanese project stands out as the ultimate casus belli, as it were. And this is because there is a shrinking pool of undiscovered oil resources that can be developed as cost effectively as the resources in Guyana's Stabroek Block.

In addition to this decline in undiscovered but cheap-to-exploit resources, supermajors have become a lot more risk-averse than they used to be in the past when long-term demand for increasing volumes of oil was virtually guaranteed. Now, it isn't. And while this is not because of any natural processes, such as better alternatives to oil emerging as fuels, it is a dangerous prospect that Big Oil is aware of—which is why it is seeking to focus on low-cost, abundant resources.

In the end, however, Chevron and Exxon are in the same boat, as expressed colorfully by Smead Capital Management's Bill Smead at a recent industry event.

"They can get into a fist fight but I think they will settle and then go grab a beer," Smead told Reuters, noting that the two supermajors had a common interest in fighting back against climate activists seeking to put an end to all oil investment.

By Irina Slav for Oilprice.com

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