Bad news  could change long-term plans. Venezuela’s navy announced the interception of an Exxon Mobil ship off the coast of Guyana, a central part of Exxon Mobil’s long-term growth plans. The long-term effect of such an interception need not damage the company.

Exxon Mobil – Alpha Gamma

Exxon Mobil Guyana Plans

Bad news  directly affects the company’s growth plans and negatively hurts the  stock price.

Exxon Mobil Guyana Plans – Exxon Mobil Investor Presentation

Guyana is a significant part of Exxon Mobil’s growth plans. Exxon Mobil increased recoverable resources here to >5 billion barrels, which provides >10% return at $40 / barrel. The company is focused on a low-cost development using proprietary technology and   drilled 5 exploration wells in 2018, with 20 addition prospects.

The company made its 9^th discovery and mobilized its third rig in October. The company anticipates the asset will first come online in 2020 and grow production to more than 800 thousand barrels per day by 2026. Several hundred thousands of these barrels will be directly attributable to Exxon Mobil. That means this asset will support an almost double-digit increase in the company’s production.

Exxon Mobil Guyana Production – Exxon Mobil Investor Presentation

The above graph shows Exxon Mobil’s Guyana plans in detail. The company plans to start production in 2020 at just over 100 thousand barrels per day. The company anticipates production almost tripling by 2022, doubling again by 2024, and rising by another 20+% by 2026.

This will result in the potential for 800 thousand barrels per day of production by 2026, 380 thousand barrels per day of which will be attributable to Exxon Mobil.

This discovery alone could result in Exxon Mobil’s production increasing by over 10% by 2026. The low cost of this asset could make it a significant cash cow for Exxon Mobil. Assuming a $35 breakeven (i.e., the 10% return at $40 per barrel ) and prices of $60 per barrel, this asset will provide Exxon Mobil with $3.5 billion in annual income by 2026.

Guyana and Venezuela History

To understand the details of the potential impacts of the decision and the worst-case scenario, it is necessary to discuss the history between Guyana and Venezuela. Guyana was originally a British territory, while Venezuela was a Spanish territory.

Venezuela Offshore Claims – Bloomberg

 Venezuela lays claim to a massive portion of Guyana’s territory. It is  ironic how millions of Venezuelans  flee  as Venezuela  pursuing  stealing another country’s territory. Venezuela claims   two-thirds of Guyana’s land area, a significant area that is effectively the entire western-half of Guyana.

Venezuela claimed a vast share  of territorial waters. These territorial water claims are strategically made to cover the majority of the Stabroek block,  similar to PRC   territorial claims designed to cover potential commodities in the South China Sea.

While such territorial claims might seem unimportant,  Venezuela’s military is significantly larger than Guyana’s and tits  navy can easily bully Exxon Mobil.

This territorial dispute was originally settled in 1899 when Guyana, then  a British territory won the dispute. As a result, any attempt by Venezuela to enter  Guyana would  be challenged  in the same way as Iraq’s attempted claim over Kuwait that led to the Persian Gulf War.

Exxon Mobil and Venezuela History

Exxon Mobil and Venezuela  have a troubled  history since  Venezuela seized Exxon Mobil’s assets in the country in 2007.   Exxon Mobil then sued Venezuela for the $1.6 billion in assets it lost plus billions more in the potential value of the assets that it had. Exxon Mobil won close to $1 billion in the judgement but it is  hard to get money from a dictatorship.

This poor history could make Exxon Mobil wary  or more careful to deal with Venezuela in future. The company might be reluctant to build up its Liza assets with the risk that Venezuela could grab them again. While unlikely, Venezuela is desperate for revenue and might choose to seize an asset producing hundreds of thousands of barrels of oil.

 Worst-Case Scenario

A potential realistic worst-case scenario.

Venezuela Claims – Stabroek News

The above map shows three. The first in darkest blue with yellow lines is Venezuela’s projection of its territorial waters from its current territory. Since it is based offshore Venezuela’s current territory, Venezuela may actively seize this entire territory in a realistic worst-case scenario. This is where the harassment of   ships occurred.

The  region with yellow stripes is Guyana’s territory that Exxon Mobil has claimed as its own. This block  covers the majority of Exxon Mobil’s exploration territory and  crucially, is right on the edge of Exxon Mobil’s discoveries. Exxon Mobil has been careful to drill only in the eastern half of its territory, which will help it in this dispute.

Venezuela, without a win in the international U.N. court will never win this block. Attempting to take it by force willnot be supported, given Venezuela’s current poor international status.  It is unlikely that Venezuela will win in court given that the last 1899 ruling was already won by the British.

Traditionally the high court of the U.N.  supported smaller countries in their claims and will  be reluctant to give away two-thirds of another country’s territory, especially to a  state failing to support its  citizens.

The realistic worst-case scenario is Exxon Mobil losing the western part of its exploration block based on the current national waters claim based on Venezuela’s current territory. That  means that Exxon Mobil loses some potential upside, but continues to secure the production potential and current assets that it has already found.

Opinions of   Other Countries

As the United States Freedom of the Seas operations show, having a powerful country onside can be a significant help.

In response to the recent excursion by Venezuela, the U.S. government has stated, “sovereign right to develop those resources, which includes allowing ships to go about their business doing surveys and other seismic activities.” This means that the U.S. government supports Guyana.

 Exxon Mobil  made a smart move by getting PRC as a partner on the project. One of the few countries willing to do business with Venezuela,  China could also use potential revenues from the coast of Guyana. As a result, should Venezuela interfere with the project, PRC can put pressure on Venezuela.

The importance of China’s impact lies in the fact that it is one of the few countries still willing to lend to Venezuela, recently lending the country  $5 billion.

Direct Investment Implications

In an absolute worst-case scenario where Exxon Mobil loses the entire asset, this may lead to a 10%  drop in Exxon Mobil’s stock price based on anticipated production from the asset. This depends on when the issues happen, whether it is before Exxon Mobil has invested significantly.

However, the potential larger loser in this is Hess Corporation  which has made Guyana an even larger part of its growth plans.   While Hess Corporation is a strong investment, it struggles to make money. A Guyana shut-down could be much more significant and  Hess stock price may drop by 20+%.

Conclusion

Venezuela’s interference with Exxon Mobil’s exploration plans could potentially have a strong negative effect on the company’s growth plans. Exxon Mobil’s Guyana operations are a strong part of its growth plans. The proposed seizure also had a strong negative impact on the shares of Hess Corporation resulting in one of the largest drops in three years.

Despite this,  the issue has been overplayed. Even if Venezuela were to gain control of the western-half of Exxon Mobil’s territory, that  will not affect the company’s production plans. For Venezuela to gain more, it would have to invade Guyana. Such an invasion is  incredibly unlikely and both China and the United States will respond. Therefore, Venezuela’s intimidation should not  affect growth plan