The recent acquisition of Noble Energy by Chevron Corp. was nothing short of stunning. As Energy Advisors Group’s David Kessler points out, this acquisition reflects a change in geopolitics that was unimaginable just a few years prior.
Chevron’s storied history began with John D. Rockefeller’s Standard Oil, which at one point had virtual monopolistic control of the globe’s oil markets. After its breakup by the Teddy Roosevelt administration, Standard Oil of California (later Chevron) has been associated with many of the largest oil and gas projects of the past hundred plus years. This includes the discovery of Saudi Arabia’s Ghawar oil field and the origination of Saudi Aramco, the discovery of the largest producing fields in California, the world-altering Spindletop discovery in Texas, major discoveries in Venezuela and the Gulf of Mexico, and the largest liquefied natural gas project in the world in Australia. Chevron has never been shy about investing significant amounts of time, energy and capital where they see opportunity, and their entrance into the Eastern Mediterranean gas markets may signal an extraordinary opportunity for Israel’s fledgling oil and gas industry, but only if Israel chooses to seize it.
Chevron has not only been associated with significant oil and gas discoveries and projects, but has also always been an industry leader in environmental and social responsibilities. The company was one of the first in the world to institute 40 hour work weeks, reliable salaries and paid vacations to employees. In recent years, Chevron has been a leader at trying to maximize safety and minimize its environmental impact. It has led the way on technology development in the Gulf of Mexico to reduce the risk of a repeat of BP’s Deepwater Horizon fiasco.
Its $45 Billion dollar Gorgon LNG development in Australia is a global model of how “industry and the environment can coexist given proper management” according to Australian conservationist Dr. Harry Butler. The Gorgon project incorporates the largest carbon dioxide injection system in the world and the company instituted the largest private quarantine management system in the world to ensure there were zero introductions of non-indigenous species on Australia’s Barrow Island to minimize any effects on the nearby nature reserve’s unique biodiversity.
Chevron’s Tech Ventures unit has also been a global leader on investing and implementing new ‘clean’ technologies. In fact, Chevron’s investment in and partnership with Brightsource Energy to build a steam generating solar tower in California was a pilot project and precursor to Israel’s world-record-setting Ashalim Power Station in the Negev.
Chevron has been public about its commitment towards researching, developing and investing in environmentally friendly projects, regardless of its potential return on investment to its shareholders. This commitment to environmental responsibility is largely possible due to Chevron’s considerable balance sheet and worldwide diversification. Smaller oil and gas companies can rarely afford to make similar investments or commitments, and Chevron’s acquisition of Noble may be a special opportunity for Israel to find a partner that will work with its government and citizens investing toward a cleaner, more responsible future.
Global gas markets are much more complex than oil markets in that natural gas is significantly harder to store and transport than oil liquids. This complexity has always led to wide discrepancies in natural gas prices across the world that is not seen in more easily transportable commodities like oil or metals. The recent Eastern Mediterranean discoveries in Israel, Egypt and Cyprus represent a unique opportunity to provide nearby Europe and the Middle East with a cheaper and less corrupt alternative than currently supplied Russian gas. This is why, since the discovery of Tamar, many oil and gas companies have flocked to the region. Shell, Exxon, ENI, Total and BP, among many others, have increased their exploration drilling activities in the region, and the area appears to be a hub of opportunity even during the current uncertain economic environment.
Unfortunately, Israel has not been a focus of much of this recent investment, with most companies focusing on Egypt, Cyprus, and even the highly volatile Lebanon. Israel though has seen very little new outside investment aside from Energean PLC’s opportunistic acquisition of Noble Energy’s forced sale of two of its discoveries. This is demonstrated by Israel’s recent licensing rounds receiving little to no outside interest from major energy companies. India based explorers submitted bids in 2017 after a visit by Israeli ministers but never followed through with active investment, and in 2019, only one new small UK based operator submitted a bid. At the same time, Greek and Turkish governments have been practically preparing to go to war for rights to explore in nearby waters.
Some have argued that it is Israel’s unique geopolitical situation with its neighbors that has created this lack of interest, but Chevron’s recent decision, among other events, signals that this is not the case. Israel has had increasingly warming relations with Arabian countries and has had a budding relationship with Egypt’s oil and gas sector for years.
Rather, it is Israel’s unreliable and adversarial business and regulatory environment that has truly limited Israel’s attraction as an investment target. This is best demonstrated by comparing the progress of Israel’s 2010 Leviathan and Egypt’s 2015 Zohr discoveries. Egypt’s government has acted as an active partner with the international oil and gas investment community, and ENI was able to begin production on the massive Zohr gas field within 30 months of discovery, a near miraculous achievement in modern times. Meanwhile, Israel’s Leviathan field only achieved first production nearly 10 years after its discovery and only at reduced production levels. Over that decade, Israel changed the tax rates and structure on the investing companies multiple times, scared away world class LNG operator Woodside Energy’s potential nearly $3 billion investment over a petty tax dispute, instituted unprecedented changes to anti-trust regulations forcing the operator to prematurely divest of its ownership before achieving its target valuation, retroactively adjusted oil and gas licensing agreements, and allowed dozens of frivolous lawsuits to proceed based on environmental claims with little scientific basis. While oil companies are no stranger to uncertainty and risk, they tend to avoid where possible any uncertainty in regulations and taxes. It should come as no surprise that after this poor treatment of foreign companies, few new international energy companies have shown any interest in establishing a presence here.
Chevron likely did not acquire Noble in order to break into the Israeli oil and gas market and its entrance into Israel may largely have been incidental. Just last year, Chevron offered to buy Anadarko Petroleum for $33 billion, significantly more than what it offered for Noble Energy. Similar to Noble, Anadarko had assets in Colorado’s DJ shale basin, complimentary acreage to Chevron in Texas’s Permian shale basin, and a major gas project offshore Africa. Anadarko though had a heavy presence in the Gulf of Mexico where Chevron is already a major operator, while Noble Energy had the Israeli gas fields that don’t seem to have any relationship at all to Chevron’s current portfolio. The fact that Noble Energy was a second choice to a company with similar assets implies that the Israeli gas fields were never the focus of the acquisition. All of this considered, the acquisition does still present Israel with enormous opportunity.
For smaller operators like Noble Energy and Energean, Israel’s gas field are not an insignificant part of their portfolio and future growth. For a company like Chevron, with a $160 billion+ market capitalization, and a diverse asset base spanning the globe, Israel’s currently producing fields may provide a reliable cash flow over the next few years, but their future development and growth are not necessarily an integral part of Chevron’s total value. If continually confronted with commercial and regulatory challenges here in Israel, Chevron will pivot its focus and investment to other opportunities around the globe with minimal regret. It will require Israel’s active participation and engagement to maintain Chevron’s focus.
Whether we like it or not, natural gas will play a significant part of the energy industry for the foreseeable future. Despite years of technological progress and upwards of $2 trillion of investment in solar and wind facilities, fossil fuels still supply approximately 80% of worldwide energy, a number unchanged since the 1970s. This is because the technology for affordable energy storage and distribution of intermittent and unwieldy energy sources like wind and solar does not exist.
Germany has been the European leader in weather dependent renewable power installations as part of its “die Energiewende” policy and as a result has only seen the highest energy cost to consumers and taxpayers across all of Europe, increasing grid instability leading to common blackouts, and no noticeable reduction in carbon emissions. In fact, Germany is now burning record amounts of dirty biomass like wood chips imported from North Carolina, and is installing a brand new natural gas pipeline from Russia much to the chagrin of the United States, all as a result of its intended reliance on wind and solar. Similar situations are occurring with other renewable energy “leaders” like California and Great Britain.
The ability to convert our power industry from coal to locally sourced natural gas has been immensely beneficial for Israel. Natural gas produces approximately 99% less particulate matter emissions than coal, leading to cleaner air and better health outcomes across Israel. Producing fuel locally makes us less reliant on global markets for energy, which has historically been a proximate cause of wars Israel was forced to participate in. Cheaper locally sourced gas has also been a boon to local factories and industry, encouraging more domestic based production and manufacturing. It seems clear that Israel’s future will be better from an economic and security standpoint with continued investment in the natural gas industry.
Chevron brings not only an enormous balance sheet and extensive expertise to invest in major projects in Israel, it also brings international clout that may help better Israel’s commercial relationships with international partners near and far. Chevron’s potential purchase of Noble Energy provides a truly unique first-time opportunity for Israel to work with an environmentally responsible, experienced and competent energy partner, with near unlimited access to world capital markets.
With Chevron’s help, Israel can become a focus of investment and progress in the natural gas and clean energy industries similar to how its early partnership with Intel helped lead to the development of the high tech industry. For this to happen though, the Israeli government has to make itself a welcoming investment environment, committing to regulatory transparency, consistency and reliability while instituting competitive tax rates. If Israel tries to treat Chevron in the same fashion it treated Noble Energy and Woodside, Chevron can and will invest elsewhere, leaving Israel again in the dust while other countries prosper. If Israel does decide to become an active, willing and reliable partner, the potential opportunities and benefits are far-reaching and considerable.