Prime Minister Netanyahu may have been premature with his praise of gas giant Chevron‘s entrance into the Israel offshore gas market following the completion of their acquisition of Noble Energy on October 5, 2020, making Chevron the operator of Israel’s Tamar (25%) and Leviathan (39.66%) offshore gas fields. Noble was acquired in an all-stock transaction for $5 billion and assuming $8 billion in debt.

Netanyahu said their entrance was “tremendous revolution in the supply of energy to the State of Israel” and “will bring billions, tens of billions and perhaps hundreds of billions of shekels to you, the citizens of Israel.” Israeli Energy Minister Yuval Steinitz said, “The entry of the global energy giant is great news for the Israeli economy and opens up opportunities for investment in the high-tech and startups in the energy sector.”

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Unfortunately, one of Chevron’s first moves in the Israeli market was to turn off the flow of gas to the Israel Electric Company (IEC) on Tuesday and demand much higher prices.

A bit more of a revelation than a revolution.

In 2012, the IEC agreed to pay $6.30 per BTU for the offshore gas from the Tamar gas field, but over the intermitting years, new agreements were made and the prices for gas dropped to $3.75 per BTU (according to a Globes report, the agreement was to sell for 10% less than the Leviathan price). The latest agreements were made with Isramco, Dor Gas, Tamar Petroleum and other partners, who have combined 53% control of the Tamar gas field, according to a TheMarker report.

Chevron and Delek, the remaining partners, refuse to honor that agreement. Noble Energy and Delek had unsuccessfully tried to block the deal for the past year.

In February, with the start of the Coronavirus crisis, natural gas prices dropped and the IEC imported liquefied natural gas (LNG) on the spot market, for an average $3.5 BTU. The pandemic also caused Noble Energy’s stock to crash which helped Chevron’s acquisition of the company.

Currently, global natural gas prices are approximately $2.60.

Chevron informed the Israel Electric Company that the they were cancelling the last price agreement, and were demanding the full 2012 price.

To leave the IEC with no alternative, Chevron also shut off the flow of gas to Israel from the Tamar gas field.

Without any other immediate options for gas to run the country’s electric generators, IEC switched over to buying gas from the Leviathan gas field at the higher price of $4.79.

It just so happens that Chevron and Delek control 85% of the Leviathan rights, so by the IEC moving over to Leviathan at its higher prices, they’ve already doubled the profits for Chevron and Delek.

Israel’s offshore drilling sites and gas finds. Credit: Noble Energy

The IEC is contractually required to buy 1.75 BCM from the Tamar gas field in 2020, and has so far purchased 1.5 BCM. The IEC now plans to buy only the minimum (0.25 BCM) from the Tamar field until the end of the year, and will look for other sources and contracts for gas for the rest of its needs (3 BCM), according to TheMarker.

As an aside, Chevron holds a 35% stake in Cyprus’s offshore Aphrodite gas field, Delek holds 30%, another 35% is held by Royal Dutch Shell. Netanyahu and Steinitz are hoping that Chevron will expand Israel’s reach into the global market via a pipeline to Europe (which may now be effectively controlled by Chevron).

The Israel Competition Authority had recently ruled that Isramco and Tamar Petroleum could make separate deals with the IEC from Noble (Chevron) and Delek, after they complained that Noble (Chevron) and Delek were blocking the the Tamar deal to halt competition, according to Globes.

Deputy Attorney General Meir Levine declared that Chevron has veto rights over new contracts on the Tamar field until the end of 2021. While the IEC says that Chevron has no right to shut off the flow of gas to Israel, and they plan to turn to the courts.

Isramco and Tamar Petroleum have also demanded the Tamar gas flow be turned back on and accused Chevron and Delek of monopolistic practices and a conflict of interest to direct business to their more lucrative Leviathan holdings.

Chevron’s entry is definitely a game changer, just not the one that Netanyahu and Steinitz expected.

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