Noble Energy Inc. slashed the risks to its colossal Israeli natural gas project by selling a stake to Australia’s largest oil producer and sealing a crucial supply deal with a Palestinian power company in one of the world’s political flash points.
Both steps, carefully choreographed over the past month, should help Noble achieve its goal of doubling production by 2018 and mitigate Wall Street’s fears about the company’s prospects in the politically unstable region.
In a deal worth $2.55-billion in cash and future revenue, Australia’s Woodside Petroleum agreed last week to help Houston-based Noble Energy and three Israeli companies develop the offshore natural gas field Leviathan. The field, along with smaller ones nearby, holds nearly 40 trillion cubic feet of natural gas, the same amount consumed each year in the United States.
The deal came a month after the Noble Energy consortium signed a $1.2-billion (U.S.) contract to begin supplying natural gas to the Palestine Power Generation Co. in a couple of years.
The group is already shipping gas to Israel from a small field near Leviathan, meaning Israel and the Palestinian Authority will both rely on the same source for natural gas.
Woodside’s experience in liquefied natural gas (LNG) projects will help regional exports begin sooner. Selling to a broad range of neighboring countries should reduce the project’s appeal as a target for attacks, security analysts say.
Regionally, Jordan, Turkey and Egypt are hungry for natural gas supply and could be future buyers, analysts say.
In a sign of how vital the natural gas is to Israel, its military patrols the seas above the deposits to defend against any potential attacks.
Despite turmoil in nearby Egypt and Syria, as well as roller-coaster negotiations between Israel and the Palestinian Authority, Noble insists it’s not naive about operating in the region.
The company decided potential risks of developing the fields amid the geopolitical turmoil were acceptable considering the probable rewards, said a well-placed source who declined to be named, citing a policy of not speaking to the media.
“When you think of Middle East conflicts, Israel really is in the best place in terms of risk,” said the same source, who is close to the company’s board of directors.
Noble will remain the project’s operator after the Woodside deal closes later this year, holding 30 per cent to Woodside’s 25 per cent. The other three partners – Delek Group, Avner Oil & Gas Exploration, and Ratio Oil Exploration – will each hold less than 17 per cent.
For Noble, the enormous offshore project in foreign waters is one it must undertake, analysts and investors say, if it hopes to replenish declining reserves faster than fellow rivals such as independent energy producers Marathon Oil Corp., Anadarko Petroleum Corp., and Apache Corp.
Noble first began operating off Israel’s coast in 1998, but it was not until 2010 that Leviathan was discovered. The company recently said there could be large oil deposits near the formation as well.
The cost to produce natural gas in the Mediterranean is only slightly less than market prices in much of Europe right now, suggesting that Asia – where prices are double Middle Eastern production costs – could be an attractive export opportunity.
That global export potential helped lure Noble and its partners to Woodside in the first place, given the Australian company’s LNG expertise.
Indeed, Noble Energy chief executive Chuck Davidson flew to Perth last month to negotiate with Woodside, which agreed tentatively to the deal in late 2012, then cooled to the idea when it was unclear whether Israel would allow LNG exports.
Noble and its development partners fought aggressively for the right to export 40 per cent of the natural gas in Leviathan and nearby fields, winning that right late last year in a decision from Israel’s supreme court.
“You knew that Israel would be pragmatic about negotiations with Noble Energy on this,” said Tim Rezvan, an energy analyst at Sterne Agee. “Leviathan is too important for the country as it works to produce more energy locally.”
Expectations are high on Wall Street, where Noble Energy’s shares have sagged in the past three months amid a dip in the price of crude oil and rising production costs. At current estimates, Leviathan is expected to begin operations in 2017.
“Assuming the project comes online, it’ll be a big part of the pie at Noble Energy,” said Rezvan.
To be sure, Noble is still investing aggressively in its United States onshore shale operations, planning to spend 70 per cent of its $4.8-billion capital budget this year on projects in Colorado’s Denver-Julesburg Basin and the Pennsylvania Marcellus formation.
But it’s spending the remainder of that budget on deepwater projects in the Mediterranean and elsewhere, and hopes to use cash flow, not debt, to finance future Israeli expansion.
“The continued demand for our gas in both Israel and other regional areas combined with the potential for multiple LNG or FLNG solutions sets us up for some dramatic growth in this region over the next decade or longer,” David Stover, Noble Energy’s president, told investors early last week.
A rare snowstorm in Jerusalem in December sharply increased natural gas demand, giving investors a hint of the project’s longer-term potential. Many Israeli power plants had to temporarily switch from coal to natural gas to produce power.
That storm helped Noble Energy’s fourth-quarter sales volumes jump 16 per cent.
“This whole region has a lot of potential due in part to the size of these energy reserves,” said Emre Tuncalp of Sidar Global Advisors, a geopolitical risk advisory firm that specializes in energy matters. “Given all the components that need to come together to develop this area, I think it’s moving forward pretty well.”