ThoughtStream: Sale of the century

Michael J Economides

January 1, 2013

Last month, Noble Energy, the Houston company that has played a vital role in drilling and confirming massive deepwater natural gas deposits (some of the largest in recent memory) in Israeli and Cypriot waters, announced a 30% sale of the Leviathan field to Australia's Woodside for about $2.5 billion.

Michael J. Economides

Under the terms of the deal, Noble Energy will sell 9.66% of the total rights in the license for $802 million. The other partners, the Delek Group, controlled by Yitzhak Tshuva, will sell 15% of the rights for $1.281 billion and Ratio will sell 5% of the rights for $417 million. These are some nice chunks of cash and Woodside's reach, so far away from its base in the remotest city of all, Perth, is newsworthy on its own merit. But there are other things to contemplate.

The prices are fire sale bargains for Woodside. Assuming that Leviathan contains 17tcf of recoverable natural gas as reported by Noble, 30% of that (more than 5tcf) has just been purchased for $0.50 per thousand standard cubic feet. Such a price is probably the lowest paid last year anywhere in the world for gas in the ground, including the US which arguably has had the lowest retail natural gas prices anywhere, less than $4/thousand cubic feet. In Europe prices hovered around $8 and in Asia topped $15. Australia, thanks to a large extent to Woodside's work offshore Western Australia, is poised to overtake Qatar as the world's leading LNG exporter.

For Woodside, getting gas so cheap in the Mediterranean and being 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.

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conservative Australian company and carrying the imprint of its long-time American CEO Don Voelte who has just been replaced by long-time ExxonMobil alum Peter Coleman. Voelte, who took over Woodside when the company was tiny, was often derided by some Australians naturally averse to a foreigner, but he laughed all the way to the bank with astute decisions establishing Woodside in a commanding position in both oil and LNG.

Woodside had to fill a vacuum in Israel – major multinational oil companies would not enter Israeli production for fear of antagonizing their Arab cohorts. Large company aversion to invest in Israel is a situation that has lasted since the creation of the state in 1948.

There is a second element to the Woodside entrance and that 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 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. However, in this type of situation what is valuable is the establishment of 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 in the region. OE


Michael J. Economides is a professor at the Cullen College of Engineering, University of Houston, and editor- in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE's position