Chevron faces turnaround challenges in East Mediterranean post $5bn Noble deal Chevron Faces Challenges in East Mediterranean Post $13bn Noble Deal

There were already too many cooks in the Eastern Mediterranean kitchen. Now a new head chef has sauntered in, with super-major Chevron’s purchase of Noble Energy. The San Ramon, California firm will have to reconcile several big egos to whip up a profitable recipe from the area’s big gas resources.

Chevron choose to step out of the challenge for Anadarko. Instead, compatriot Occidental bought it for $55 billion (Dh202bn) last August, and promptly got into trouble with a massive debt load and the crash in oil prices. Attempts by the Houston-headquartered independent to raise about $4.5bn by selling on Anadarko’s assets in Algeria and Ghana to France’s Total foundered on political problems.

The acquisition of Noble is a much smaller deal. Chevron is paying $5bn in stock, at a modest 7 per cent premium to Noble’s pre-announcement share price, and assuming $8bn of debt. Noble is a rare beast; after Anadarko, few sizeable American oil companies today have substantial non-US assets, ConocoPhillips, Hess and Apache being the main standouts.

The acquisition looks opportunistic: there are some synergies in the Permian Basin of Texas, but neither Noble’s other shale acreage in Weld County, Colorado and the Eagle Ford of South Texas, nor its position offshore Equatorial Guinea in West Africa, overlaps with Chevron.

But the bulk of the reserves, production and value comes from Noble’s assets in the eastern Mediterranean. The company was the pioneer of gas exploration in Israel and struggled for years to attract a larger international partner to its two large fields, Tamar and Leviathan. It also has a stake in the first gas find off Cyprus, the Aphrodite field in 2011.

In February it entered Egypt by picking up shares in exploration blocks operated by Shell off the western Mediterranean coast, adjacent to areas allocated to Chevron, which was only granted its first assets in the country back in December.

Chevron is thus a latecomer to the party. The eastern Mediterranean is already a cauldron of competition between large companies, with every supermajor present. Shell has a stake in Aphrodite, somewhat accidentally acquired when it bought BG in 2016, as well as in offshore Egypt. Eni of Italy discovered the giant Zohr field and thus revived Egypt’s gas industry in 2015, and Mubadala, Russia’s state giant Rosneft and BP have since bought stakes in Zohr.

Chevron’s main American rival, ExxonMobil, is exploring off Egypt and has found the Glaucus field in Cyprus. Total and Eni drilled Lebanon’s first offshore well in April, which was dry, but they had success in 2018 with the Calypso find in Cyprus. To complete the smorgasbord, Eni is the lead partner in the idled liquefied natural gas (LNG) plant at Damietta in the eastern Nile Delta, and Shell the main player in the Idku LNG plant near Alexandria. These under-utilised facilities are key to exporting gas from the area.

Despite the eastern Mediterranean’s large gas resources, almost none is exported beyond the region. Many analysts blame politics for the hold-up, and indeed the area is a confusing tangle of border claims and disputes involving Israel, Palestine, Lebanon, the divided island of Cyprus, and Turkey’s increasingly grandiose territorial aspirations.

But the main obstacle to further development is simple economics. The deepwater gas is relatively expensive to produce and divided between several fields with different owners and national jurisdictions, making it hard to achieve economies of scale. Apart from Egypt, the local gas markets are small and already saturated. In January, Greece, Cyprus and Israel signed a deal for a pipeline running to the Greek island of Crete and on to the mainland and Italy.

But by law, Israel cannot export gas more cheaply that its domestic prices – with its lowest-priced contract at about $4 per million British thermal units (MMBtu). But a long, very deep, and expensive undersea pipeline would deliver to a southern European market where gas currently trades barely above $2 per MMBtu – not a profitable proposition.

Chevron may be hoping it can play the much-needed role of aggregator, bringing together gas from several fields to make either a pipeline project or a new LNG export plant viable. It could also buy out financially troubled partner Delek from Aphrodite and/or Leviathan. Chevron is a leading global LNG player, but well behind Shell and ExxonMobil. It is selling its stake in the pioneering North-West Shelf LNG plant in Australia and walked away from the proposed Kitimat project in Canada in December. Absent from Mozambique, which the Anadarko deal would have brought it, it could do with more LNG growth options.

But realising the full potential of its new resources will not be easy. Big oil companies bring big egos. As partners and competitors in Sakhalin in Russia’s far east, and in Western Australia, Chevron, ExxonMobil and Shell butted heads. Chevron, Shell, Eni or even ExxonMobil or Total might all feel they are the natural leader to aggregate the area’s gas, and this could get even more complicated if one finds another major field in planned drilling in Egypt, Cyprus or Lebanon.

Chevron is certainly not naive or unaware of these issues. Noble’s existing functioning assets have low production costs and add reserves cheaply. The supermajor may have moved to the head of the roster for the eastern Mediterranean but making a success of the current dog’s dinner will demand a lot of skill.

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