Sam Rines penned this as a Managing Director of CORBŪ and has granted me permission to share his entire discussion about oil, Guyana, etc. with our readers. He is right on the mark. I thank Sam for his analysis and letting me share it with our readers.
Let me just add this introductory note and then pass the baton to Sam. IMHO, market agents are ignoring this developing story about oil and the geopolitics in South America. The national political body in the US is also not paying attention here, and that ignorance is fraught with risk. We are distracted in this election year. For background please see the history of neglect by the US when it comes to Guyana and national policy. Note how the US Senate failed to ratify a treaty and how that now returns to haunt us. Note how Maduro in Venezuela uses that background as a pretense for his behavior. Remember, Maduro has failed to honor any agreement he made with us. Note that there are many asylum-seeking Venezuelans now settling and making new lives in the United States. I know several of them well. They are hardworking and community-oriented and great additions to our nation, in my opinion.
For historical background see:
“The Olney-Pauncefote Treaty of 1897,” https://www.jstor.org/stable/1842352
“TEXT OF THE ARBITRATION TREATY BETWEEN THE UNITED STATES AND GREAT BRITAIN,” https://www.jstor.org/stable/25750990
“Olney–Pauncefote Treaty,” https://en.wikipedia.org/wiki/Olney%E2%80%93Pauncefote_Treaty
“Richard Olney,” https://en.m.wikipedia.org/wiki/Richard_Olney
Now here’s Sam Rines.
Guyana > OPEC+
Bottom Line: While the oil headlines are focused on OPEC+ decision to “extend and pretend”, WTI and Brent remain range bound. The crosscurrents in the market are numerous. But Guyana matters more than OPEC+ for the market today, tomorrow, and well into the future.
Level setting before delving into Chevron / Hess / Venezuela –
• There is a war in the Middle East (geopolitical oil premia)
• Russia has a (rather weak) oil price cap enforced by the “Price Cap Coalition” (neutral to slight negative)
• OPEC+ cuts are ongoing (positive price)
• US production is at / around highs (negative price)
• US SPR is rebuilding stocks slowly (neutral price)
• OPEC+ has ~5m bbls / day of spare capacity (negative price)
That is a non-comprehensive list of puts and takes in the oil market. There is a strong argument to be made that the primary beneficiaries of OPEC+ cuts and geopolitical risk premia are US super majors. After all, OPEC+ has ~5m bbls/day (IEA estimate) in spare capacity and putting that back on the market would push prices lower.
With all of that in mind, the “new Permian” – Guyana (GY) – is more important for oil markets than the OPEC+ extension. And Guyana is back in the news thanks to the Chevron / Hess proposed merger and saber-rattling from Maduro and Venezuelan territorial claims.
The Chevron / Hess headlines over the “right of first refusal” (ROFR) deserve some clarification. For some background, the current GY set-up is an Exxon led consortium with CNOOC and Hess. The Stabroek joint operating agreement has a right of first refusal to Exxon / CNOOC.
(Chevron S-4 filing)
When Chevron stated it was in discussions with Exxon and CNOOC regarding the ROFR, there were plenty of hot takes around “how did the lawyers miss this?” Spoiler – they did not. The ROFR shows up in nearly every portion of the timeline leading up to the proposed merger announcement on the 23rd.
(Chevron S-4 filing)
Chevron has made it clear; Guyana is the reason for the merger. It is that simple. And the ROFR was not a post-merger surprise. It was well evaluated prior to the offer.
Also worth noting is the size of the break-up fee for Hess - $1.75B. And that is on Hess.
(Chevron S-4 filing)
Also included in the S-4 timeline is a comment from the VP of GY (there is no other political figure cited). It would be difficult for Chevron to make it clearer that the transaction is all about gaining exposure to a singular asset. Given the Exxon outlook for a doubling of production by 2027 (~650k to ~1.2m), Chevron’s interest makes sense.
But there is Venezuela. Maduro does not like Exxon. And the above comments came after the Chevron / Hess merger announcement. The reason for leaving Chevron aside? The commitment to drill in VZ (65k bbls) and the proposal to extend the joint venture timeline does not hurt.
The increased rhetoric from Maduro could be construed as “capex jealousy” – a bit of “what about me?” While Exxon is the devil to the Maduro regime, Chevron is treated much differently. That could be both a positive and a negative for the stability of the VZ / GY relationship.
Maduro may be threatening with the intention of garnering additional investments in his own hydrocarbon industry. And if those do not materialize, there is little for the regime to lose in perpetuating a conflict in the region.
There are several moving parts - none of which are certain. From the ROFR to incremental Chevron investments in VZ to VZ’s threat of military action, there is no shortage of risk. The only guarantee is volatility. It is not OPEC+. It is Guyana.
Kotok here. I again thank Sam Rines for this superb analysis and you can learn more about him at: https://www.linkedin.com/in/samuelerines
Closing note: Cumberland is overweight the energy sector, including oil and gas, in the US Equity ETF portfolio.
David R. Kotok
Co-Founder and Chief Investment Officer
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