Hess Corporation made shrewd oil market moves

The Stabroek Block was described as, “an extraordinary world-class asset” in a recent investor conference call by John Hess. He then goes on to state that, “Nothing competes with it in the industry”. Mr Hess was making his comments during a recent investor call which included analysts from some of the world’s biggest investment banking firms such as Goldman Sachs and JPMorgan Chase. A seasoned executive with decades of experience in the oil industry, Mr Hess cannot throw out meaningless statements in a period where Hess Corporation depends on investment banks for survival. JPMorgan Chase recently provided a US$1 billion loan to Hess Corporation in the second quarter. This loan was provided during a period of turmoil that saw billions of dollars of write-downs in oil assets from some of the largest oil companies in the world such as Total and Chevron.

Why the investment banking confidence in Hess? If you are going to have someone invest your money, you want to ensure they return your principal and give you a return on your principal. Hess Corporation has demonstrated it is a prudent investor by hedging over 80% of their crude production for 2020. Hence, their sale price for the hedged crude will be at US$55/barrel at a minimum. The breakeven price for Liza-1 is US$35/barrel. The hedging was a prudent move given that oil hovered around US$20/barrel only a few months ago.

One could say that John Hess and his company were lucky and Guyana unlucky not to hedge. But Hess Corporation made some other shrewd moves in March and April when oil was toeing the US$20/barrel line for Brent crude. Hess Corporation chartered 3 large crude carriers to store millions of barrels of oil during those months. Hess Corporation will deliver its first batch of the stored crude in September to China. And, expects to sell the remaining barrels by the end of the year. The current price of Brent crude is approximately US$43/barrel, more than double the lows from a few months ago. Given that Hess Corporation had already had 80% of its production hedged, it is notable that Hess Corporation even went further to extract as much value as it could in turbulent times.

It was reported in the press that Guyana received US$55 million for its first million barrels of oil earlier in the year but only US$35 million for its second million barrels. That is a US$20 million difference, an approximately 35% drop in just a few months. Why didn’t the government employ a similar strategy of hiring crude carriers to store oil for later resale? Guyana received

US$35/barrel for the second batch of oil. Given the price of Brent crude is around US$43/barrel today it may have secured a few more million dollars for the Guyanese people by employing a storage tactic.

It is well known, in the oil industry, that shale oil companies need oil between US$40 to US$50 a barrel to survive. One of the world’s biggest producers, Saudi Arabia, needs oil near US$80/barrel to run the country. The world’s key producers cannot sustain selling at US$20/barrel or even US$35/barrel. The government must have realized how unlikely it was that price of crude could stay at US$20/barrel or US$35/barrel when so many oil producing countries started to make significant cuts to production to boost prices. Did the government look at alternatives instead of selling the oil immediately?

Why sell in a market crash? Especially, when the resulting proceeds are inaccessible by the government. That is not prudent investment behaviour. We should learn a few strategies to maximize the revenue from our oil by observing the actions of experienced players in the oil game.

Yours faithfully,

Darshanand Khusial

On behalf of Oil & Gas Governance Network