By Michael J. Economides
On December 2, Noble Energy, the Houston company that has played a vital role in drilling and confirming massive deep-water natural gas deposits (the largest in recent memory) in Israeli and Cypriot waters, announced a 30 percent sale of the Leviathan field to Australia’s Woodside.
Under the terms of the deal, Noble Energy will sell 9.66 percent of the total rights in the license for $802 million. The other partners, the Delek Group Ltd., controlled by Yitzhak Tshuva, will sell 15 percent of the rights for $1.281 billion and Ratio will sell 5 percent of the rights for $417 million.
These prices are firesale bargains for Woodside. Assuming that the Leviathan contains 17 Tcf of recoverable natural gas as reported by Noble, 30 percent of that (more than 5 Tcf) has just been purchased for $0.50 per thousand standard cubic feet (Mcf) or million Btu. Such price is probably the lowest paid this year anywhere in the world for gas in the ground, including the United States which arguably has had the lowest retail natural gas prices anywhere, less than $4/Mcf. In Europe prices hovered around $8 and in Asia toped $15. Woodside either has or contemplates several contracts calling for prices of $12 to $15/Mcf. For Woodside getting gas so cheap and been able to control it in a world market into which it has already established a large and ever increasing presence is a no brainer. It is also clear that the Israeli sellers wanted cash, any cash asap. How logical is that is another matter.
Woodside in Israeli waters is of course an important event no matter what. The company is somewhat of a maverick, a different breed from the traditional conservative Australian company and carrying the imprint of its long-time American CEO Don Voelte who was just replaced by long-time ExxonMobil alum Peter Coleman. Voelte who took over Woodside management when the company was tiny, was often derided by some Australians, naturally averse to the foreigner, he laughed all the way to the bank, with astute decisions establishing Woodside in a commanding position in both oil and, especially, liquid natural gas (LNG) production from Australia’s offshore North West Shelf.
Woodside had to fill a vacuum in Israel, repeatedly brought up in the Israeli press. Major multinational oil companies such as Shell, BP, ExxonMobil, Chevron and the like would not enter Israeli production for fear of antagonizing their Arab cohorts, which for practically all of them, provide the lion’s share of their activities. Large company aversion to invest in Israel is a situation that lasted since the creation of the country in 1948.
The second element to the Woodside entrance is the shutting out of Gazprom, Russia’s massive monopoly. Gazprom has been circling the area trying to buy into Israeli and Cypriot gas in what can be blatantly considered as a Trojan horse-kind of relationship. Gazprom would not want Mediterranean gas to be threatening its hegemony over Europe. There have been constant rumors that Russia would be even willing to throw Iran off the proverbial bus had Israel let Gazprom in.
Israel, taken on its own has very limited options for massive exports of gas. Pipelines through Arab countries or through Turkey are not politically feasible. LNG is the only answer and a liquefaction facility in Cyprus is the obvious choice.
Where do the recent maneuvers leave Cyprus? Not much has changed other than the dirt cheap price at which Israeli interests sold their properties. Surely the Woodside price will have an impact in the future.
However, in this type of situation, what is valuable is establishing long-term sales contracts where supply is guaranteed. Cyprus is immediately embarking on a drilling boom and the country’s petroleum future, properly managed, can lead the way from the area. Fortunately, after the February 2013 elections, Cypriot leaders will have the opportunity to concentrate on this critical issue, freed from the ongoing election campaign posturing. For Israel it should become abundantly clear that such an alliance, in fact unitization, will bring enormous benefit to both countries.
Michael Economides is Editor-in-Chief of the Energy Tribune