A major global oil company doing business in Israel? Until Monday, it seemed as likely as the Arab League opening a branch office in Jerusalem, an August blizzard in Tel Aviv or Bibi announcing he can no longer remain in office under the cloud of an indictment.
But now Chevron, the world’s No. 6 energy company, is about to do just that, albeit indirectly by buying control of Noble Energy. Noble is a Houston-based company that is the lead partner in Israel’s two biggest gas fields, Leviathan and Tamar. The deal, if completed (as is almost certain since both sides have already agreed to it), will be the biggest thing to happen in Israeli energy since the first natural gas was discovered 20 years ago.
Why is this happening? That’s a pretty big question. It would be better to hone it down to five specific ones.
Q: Does Chevron really have any interest in Israel, or did it agree to buy Noble for its other assets, and plans to eventually divest the Israeli holdings?
A: Israel has been radioactive as far as the global energy industry was concerned. The energy majors had too many interests in the Arab world to risk exploring in Israel. Even with the discovery of important reserves of natural gas in Israeli territorial waters, Israel was still too small-change to make it worth the trouble. But the dynamics have changed. The Gulf countries have warmed to Israel and the wider Eastern Mediterranean is emerging as a major source of gas.
In Chevron’s case, it has interests in Saudi Arabia-Kuwait and Iraqi Kurdistan, so it must have taken into account the political dangers of buying Noble and its Israeli assets and decided they were manageable, perhaps no longer existent.
Q: So Chevron is here to stay?
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A: If you take the company at its word, then yes. Speaking with analysts after the deal was announced, Chevron CEO Mike Wirth talked optimistically about the East Mediterranean business. The fact is, Israel accounts for more than 60% of Noble’s developed energy reserves (the rest are in the United States and Equatorial Guinea) and in the current environment they would be impossible to sell anytime soon.
Many analysts say the East Mediterranean is in fact Noble’s main attraction. Israel is a key component of an emerging East Mediterranean gas hub that encompasses Egypt and Cyprus as well. Together with Israel’s Delek Group, Noble has gas assets in Cyprus while Chevron has recently acquired drilling rights in Western Egypt and the Red Sea. Without Israel however the “East Med” bonanza won’t happen.
Q: Aren’t gas prices, just like oil prices, so low that the East Mediterranean hub is an all but hopeless venture?
A: Yes, gas is in the doldrums. That said, Chevron is looking to the long term. The growing market share of renewable energy for generating electric power will be coming mainly at the expense of coal. Natural gas is expected to hold its own and, with growing demand for electricity, overall demand for gas will grow, too.
The baleful politics of the East Mediterranean – Turkey threatening Cyprus, Hezbollah threatening Israel, and populism delaying Israeli energy development – have made developing the gas for export to the big European market more difficult than it should be. But as Wirth said (apologies for the grammar): “When you’ve got a large, low-cost resource base like this proximate to large economies, we will find a way to move the gas to the market in a manner that is competitive.”
Q: Okay, so it’s good for Chevron in the long term, but what does it do for Israel? Aren’t we just trading one capitalist pig for another?
A: To a degree, that is true. All pigs are traif, meaning in this context that Israeli consumers will continue to pay high prices for gas because of the way the contracts between the Tamar and Leviathan partners and Israel Electric Corporation, their main customer, were written.
Perhaps that is why Chevron referred to Noble’s “low-capital, cash-generating offshore assets in Israel.”
But some pigs are fatter than others, and that’s important distinction. From the Israeli perspective, Noble looks like an energy giant, but it is a pipsqueak in global terms. It’s a small player that gambled big when it went looking for energy offshore Israel, and it won far more than it could have ever hoped for. But it never had deep enough pockets to adequately develop the gas it found. It was like winning a mansion in a poker game but having no money to furnish it.
As energy prices plunged and the coronavirus wiped out demand, Noble had its back against the wall. It was losing money and was weighed down by debt, forcing it to cut its investment spending. Chevron is buying a company in a share swap (that is, no cash) for just $13 billion, including debt. Six years ago, when times were good, Noble’s market cap was more than $28 billion.
Q: What’s next?
A: The long-term prospects of an East Med hub have improved. Chevron has the capital and a presence in all the key countries to make it happen. Having crossed the red line vis-à-vis Israel, it may even entice other oil majors to come to Israel, maybe one day in the very distant future Saudi Aramco. When pigs fly.