Chevron’s acquisition of Noble Energy launched an ongoing M&A frenzy in the U.S. shale patch as companies look to consolidate to cut costs while adding immediately cash-flow-positive resources to their portfolios. For Chevron, the US$5-billion all-stock deal to take over Noble Energy was not only about adding acreage in the DJ and Permian basins.
Through the transaction, the U.S. supermajor is gaining more exposure to natural gas assets in the Eastern Mediterranean, including a large stake in Israel’s biggest gas field, which started production in December 2019.
The already producing Leviathan gas field, the biggest energy project in Israel ever, is diversifying Chevron’s portfolio with more natural gas resources and a position in the eastern Mediterranean very close to the Middle East and European gas markets.
The timing of the U.S. supermajor’s bet on natural gas in the Eastern Mediterranean coincides with expectations that gas will play a major role in supporting the growing share of renewables in Europe amid the European Union’s (EU) push to bet heavily on renewable energy sources to reach carbon neutrality by 2050 under the European Green Deal.
Chevron’s timing for expanding in the Middle East is also very good from a political standpoint. Israel and two Arab countries have recently agreed to normalize relations in what could turn out to be positive momentum for growing the relations between formerly hostile nations through energy.
Last but not least, by taking over Noble Energy’s producing assets in the Eastern Mediterranean, Chevron expects strong cash flow and returns in the near term, while capital expenditure requirements will be low.
“Noble Energy brings low-capital, cash-generating offshore assets in Israel, strengthening Chevron’s position in the Eastern Mediterranean,” Chevron said earlier this month, announcing it had completed the acquisition.
From The Permian To The Middle East
Chevron, like all U.S. companies, cut capex in the Permian early this year in response to the market conditions and plummeting oil prices. Chevron cut in March its guidance for 2020 organic capital and exploratory spending by 20 percent to US$16 billion, including a US$2-billion cut in upstream unconventionals, primarily in the Permian Basin.
Prompted by the oil price collapse, Chevron is diversifying its portfolio with gas assets outside the U.S. to seize opportunities in the growing natural gas markets in Europe and the Middle East as global gas demand growth is expected to be higher than oil demand growth, both in the near future and in the long term.
What’s more, Chevron’s newly-acquired assets in the Eastern Mediterranean will not be capital-intensive in the near term.
“At a time when cash flow matters, that’s a very appealing attribute,” Chevron’s chairman and chief executive Mike Wirth told Reuters in an interview published this week.
Eastern Mediterranean Draws More Interest From Majors
Interest in the Eastern Mediterranean has increased in recent years, and Chevron sees the area as a promising province for additional natural gas discoveries.
“We like the Eastern Med. It’s becoming quite a prospective province, an area that perhaps had been a little bit underexplored historically,” Wirth said at the Energy Intelligence Forum earlier this month.
Since Italy’s major Eni discovered the giant Zohr gas field offshore Egypt in 2015, the Eastern Med has attracted more interest from international oil companies.
“Five years ago the Eastern Med wasn’t viewed as endowed from a resource standpoint as I think most people would say today. That’s a fundamental shift,” Wirth told Reuters.
Arab-Israel Rapprochement Could Help Energy Projects In East Med
Companies such as Chevron also see the recent normalization of relations between Israel and the United Arab Emirates (UAE) and Bahrain as positive for energy projects. Israel also has normalized relations with Egypt and Jordan, and, thanks to Chevron’s new asset—the Leviathan gas field—started exporting natural gas to Egypt and Jordan in January this year.
“This move also allows Israel to export some of its natural gas to Europe through Egypt’s LNG facilities, and promote Egypt’s status as a regional gas hub,” the Israeli energy ministry said in mid-January.
The deal under which Israel will export natural gas to Egypt has been described by Israeli officials as one of the most important bilateral agreements since the two countries made peace 40 years ago.
“I would say that the ties between countries are moving in a positive direction,” Chevron’s Wirth said at the Energy Intelligence Forum, commenting on the relations in the Middle East.
“These things aren’t a straight line. They can go up and down. But we see a lot of positives to support the development of commercial ties between countries, and energy can be a very important component of that,” Chevron’s top executive said.
Chevron is also interested in partnering with Qatar in its plans for a major expansion of its liquefied natural gas (LNG) production and exports, Wirth said.
After the downturn is over, Chevron could be well-positioned to further develop natural gas resources in the Eastern Mediterranean, diversifying its strategic position in U.S. shale with opportunities to sell gas to the Middle Eastern and European markets.