US major Chevron is not letting the cash crunch instigated by the collapse in oil prices and Covid-19 get in the way of its ambitious target to further develop assets it will soon acquire once its $5bn takeover of compatriot Noble completes. MEES learns that the US major has already held high-level discussions with key stakeholders to begin development of Phase II of Israel’s 23tcf Leviathan offshore gas field by January next year.
That plan envisages the construction of a 360km pipeline directly to the Shell-operated 7.2mn t/y Egypt LNG export terminal at Idku on Egypt’s Mediterranean coast (see map). Leviathan was brought online at the end of 2019 (MEES, 3 January). Chevron is keen to proceed with the next phase as soon as possible.
Leviathan Phase I development was scaled down to 1.2bn cfd capacity as the partners in the field, operator Noble (39.66%), Israel’s Delek Drilling (45.34%) and compatriot Ratio (15%), were unable to secure enough export deals to justify larger development.
But Chevron is confident it can find buyers for Leviathan gas. “I think when you’ve got a large, low cost resource base like this proximate to large economies we will find ways to move the gas to the market that’s competitive,” CEO Mike Wirth said on 20 July, following the takeover announcement (MEES, 24 July).
Leviathan gas already makes its way to Egypt via the 7bcm/y EMG pipeline that links Ashkelon in Israel to El Arish in Egypt. But flows here have been erratic since starting-up in mid-January (MEES, 17 January). A clause in the gas sales deal allows the off-taker, private Egyptian firm Dolphinus, to halve 350mn cfd contractual volumes when the price of Brent falls below $50/B (MEES, 10 July).
Chevron, with sizable stakes in LNG export projects in Australia and Angola already has a customer base for the super-cooled fuel: Mediterranean output would be a handy addition to its global portfolio. And the firm’s growing presence in Egypt, where it will be involved in a total of five offshore Mediterranean blocks once the Noble takeover completes (MEES, 21 August), is likely to make Cairo favorably disposed to such plans. The fact that Egypt’s oil minister Tarek El Molla was a Chevron man for 23 years can’t hurt either.
The firm will also have to maneuver the bureaucratic minefield in Israel, where this week the deputy attorney general and antitrust authority decided to permit Noble to keep its veto rights for the marketing of gas at Israel’s other producing field, 11tcf Tamar (MEES, 11 September).
East Mediterranean Gas Fields & Infrastructure
ABLE SPENDERS
Although Chevron, like oil firms around the globe, has slashed spending (MEES, 19 June), its debt levels remain low. This means that the major retains financial room to maneuver – whether for acquisitions, or for new projects. The same cannot be said for the remaining partners at Leviathan.
Delek Drilling’s parent company Delek Group has been selling off assets this year as it looks to avoid defaulting on a number of loans. Delek Drilling itself raised $2.25bn in a bond offering in August, almost all of which immediately went to pay off debts (MEES, 7 August).
One possibility is Chevron buying a Leviathan stake from Delek, which would give the Israel firm cash to spend on development but also make the US firm the majority stakeholder in the field.
Another possibility is Chevron buying out Ratio, which would then leave the US firm with a majority 54.66% stake.
SHELL-CHEVRON APHRODITE TIE-UP
MEES learns that Chevron has also enlisted the help of Shell to find investors with deep pockets that could be interested in joining both the Leviathan project, and also Cyprus’ 4.1tcf Aphrodite field. Here Shell with 35% already partners operator Noble/Chevron with 35% and Delek with 30%.
Aphrodite is just 30km northwest of Leviathan.
Shell’s motivation in expediting both Leviathan and Aphrodite production is the possibility of increasing flows to its idle LNG plant at Idku. Shell’s WDDM fields, which have long been the key suppliers of gas to ELNG, are in long-term decline (MEES, 4 September). Since mid-March ELNG has exported one cargo, in late July, and will remain shut until mid-October (MEES, 10 July).
In November last year the partners at Aphrodite signed a new production sharing contract that envisaged FID on the field by 2022 and first gas by 2025 (MEES, 8 November 2019).
The initial plan was to build a 340km pipeline directly from Aphrodite to Idku, which would cost around $1bn. Significant savings could be made by hot-tapping the Leviathan to Idku pipeline. This would increase the profit margin for the partners at the Cypriot field, but also the geopolitical complexity.
The shortest route for Aphrodite to hot-tap the Leviathan pipeline would be through Israeli waters. Aphrodite development would also require Israel and Cyprus to sign a unitization agreement as a small portion of the field overlaps into Israeli waters.
There is currently open dialogue between the two countries as they try to come to an agreement but with Chevron looking to get the ball rolling on Phase II of Leviathan, a deal could be reached before long (MEES, 7 August).
Shell has met with a number of IOCs in recent months in search of an investor that could possibly replace Delek at Aphrodite, MEES understands. With development costs estimated at around $4bn for the Cypriot field, Delek’s 30% stake would put the Israeli firm on the hook for around $1.2bn, money the firm may struggle to raise.
CHEVRON/NOBLE:COURTSHIP RITUALS
MEES revealed in October last year that Chevron was eyeing entry into Egypt (MEES, 4 October 2019). Just before the turn of the year it was awarded a block in the country’s relatively unexplored Red Sea region (MEES, 3 January). Documents filed last month by Chevron as part of its Noble takeover reveal that by then discussions between the two firms were already underway.
By mid-2019 Noble’s board had concluded that the firm “would likely need to participate in consolidation in some form, whether as an acquirer, through a merger-of-equals, or by combining with a well-capitalized major, integrated company.”
In December, during a telephone call between Noble’s VP of Business Development Amir Nebenzhal and Chevron’s GM, Mergers & Acquisitions Frank Mount, the former advised that “Noble Energy was not interested in a complete sale of its Eastern Mediterranean assets, but was potentially considering a partner.” The reason behind this is to “reduce Noble Energy’s concentration risk and help accelerate the next phase of capital investment for growth needed in the region.”
Already seemingly eyeing Leviathan, Mr Mount in February requested to visit the field’s facilities whilst he was in the region to announce Chevron’s entry into Egypt. Noble turned down Mr Mount’s request as it believed the optics “could be disruptive to Noble Energy operations and lead to regional speculation.”
It was not until 12 May, during a meeting between Noble’s President and CEO Brent Smolik and Chevron’s VP, Business Development Jay Pryor that the former was no longer considering selling 50% or more of its East Mediterranean assets “but would be willing to entertain a serious offer to acquire the company.”
Just over two weeks later on 28 May, Mr Pryor informed Mr Smolik that Chevron was interested in acquiring Noble Energy. Noble’s board will meet at the start of October to vote on the takeover.
SPANNER IN THE WORKS
One potential spanner in the works was this week thrown by US hedge fund Elliott Management, founded by billionaire Paul Singer.
Elliott has built up an unspecified but sizable stake in Noble in the weeks since the Chevron takeover was announced, the firm revealed in a 4 September filing to the US Federal Trade Commission.
Bloomberg reports that Elliott aims to make use of its stake to attempt to force Noble to abandon the tie-up plans. “Elliott believes the company is better positioned to benefit from a recovery in oil prices on a standalone basis, and should consider selling its Mediterranean assets when that happens,” Bloomberg says, sourcing “people familiar with the matter.”
Whether Elliott Management holds enough shares to put the brakes on the deal, or indeed force Chevron to up its offer, is unclear. Neither Chevron nor Noble have commented on the current situation.
