Energy majors seizing East Mediterranean opportunities

Leviathan platform  credit: Albatross
Leviathan platform credit: Albatross

Abu Dhabi's ADNOC and BP have formed a joint venture to operate in Egypt and remain in protracted talks to buy Israel's NewMed.

ADNOC (Abu Dhabi National Oil Co.) entered operations in the East Mediterranean for the first time last week in a partnership with BP in Egyptian economic waters. This comes one year after ADNOC and BP began talks to acquire 50% of NewMed Energy (TASE: NWMD) (formerly Delek Drilling). There are many questions regarding the effects of the move on the energy industry in Israel in general and the NewMed deal in particular.

UK-UAE collaboration

ADNOC (49%) and BP (51%) decided to set up a joint venture in Egypt in which the British energy major will transfer its share in three development concessions and exploration agreements in Egypt to the project. On the other hand, ADNOC will generate cash for future investments.

The choice by the companies to strengthen their collaboration through Egypt is not accidental, because it is a natural gas powerhouse in the Eastern Mediterranean and Africa. In 2022, for example, Egypt produced about 64.5 BCM (billion cubic meters) of natural gas, which is more than a quarter of all African production. For comparison, Israel's gas production in 2022 was 21.9 BCM. Another consideration in choosing Egypt is BP's involvement in fields that make up about 70% of Egyptian gas.

Even before the new venture, BP was a significant player in Egypt with 10% of the Shorouk concession, which includes the Zohar gas reservoir, the largest in the region (about 850 BCM, compared to about 620 BCM in Israel's Leviathan). At the same time, BP owns 100% of the North Damietta block which includes the Atoll field (about 45 BCM), and about 50% of the North El Burg field, which contains the undeveloped Satis field. These holdings will be transferred to the joint venture with ADNOC, along with the concession agreements in North El Tabya, Bellatrix-Seti East, and North Al-Fayrouz.

The NewMed deal

In March 2023, the Israeli energy industry was struck by the news that BP and ADNOC were interested in acquiring half of NewMed Energy, controlled by Yitzhak Tshuva's Delek - all the partnership units held by the public (45%), and about 5% of Delek Group's participation units.

The surprise was not so much about the interest in NewMed, which owns 45.33% of Leviathan, the largest gas field in Israel, but rather the price of NIS 12.05 for each participation unit, an overall valuation of NIS 14.2 billion - a 65% premium on NewMed's share price at the time.

Six months later, "Reuters' reported that an independent committee examining the ADNOC-BP bid recommended that the offer should be raised by 10-12%, or $250 million. Talks are still ongoing between NewMed and ADNOC and BP.

Gas exploration in Israel

An interesting impact that could arise from the completion of the purchase of 50% of NewMed, is a change in the structure of holdings in gas exploration in Israel's northern economic waters. In October, the Ministry of Energy and Infrastructure announced that NewMed had won the tender for gas exploration in Block I, west of the Karish field, together with BP and Azerbaijan state energy company SOCAR, with each company holding 33.3% of the license.

"Globes" has learned that if the purchase of 50% of NewMed goes ahead, the joint venture between BP and ADNOC in Egypt will not have a stake in Block I. What may happen is that BP will transfer its 33.3% to NewMed, which will hold approximately 66.6%. This would not alter SOCAR's role as operator, since its selection relates to business restrictions on Israeli company NewMed.

While the NewMed, BP, SOCAR consortium won Block I, cluster G, southwest of Leviathan, was won by Ratio Energies (TASE: RATI) (which owns 15% of Leviathan) with Dana Petroleum (which operates in the North Sea) and Italy's ENI (as the operator). These are only two of the four clusters allocated in the tender, while no decision has yet been made on allocating the other two clusters.

The two clusters that were allocated were won by six companies, four of them new to Israel, in 12 exploration tenders, and indicate the source of ADNOC's interest. The major energy players estimate that more gas can be found in Israel's economic waters and are prepared to invest big money. In the first stage on the way to production, seismic surveys are carried out for which cost about $10 million.

If the seismic surveys indicate a probability of production that is higher than 20-30%, drilling is carried out in the sea. This investment ranges between $70-100 million dollars and after that, investment continues to become more expensive. Development drilling to determine whether it is actually possible to produce can cost $200 million.

Where is Leviathan heading?

The Leviathan gas field is a strategic asset not only for NewMed, but for the entire State of Israel. It is the largest reservoir (about 620 BCM), the one from which the most is produced (11.4 BCM in 2022, compared with 10.2 BCM in previous years), and much more is exported from it (about 83% of all exports).

Leviathan's current annual output limit is 12 BCM, with the aim being to increase to 14 BCM next year by laying a third pipeline from the reservoir to the platform, with an investment of $570 million. The big question that will also impact viability of the deal for ADNOC and BP is increasing production even more in the long term. Currently, NewMed's plan is to increase production to 21-23 BCM annually through two additional drillings in the field, the laying of a fourth pipeline and additional modules for handling natural gas on the platform.

This large project will cost $3 billion, but without a critical mass for export that will guarantee the return of the investment, NewMed won't promote the project. What will help is the guarantee of increased exports, with two main options at stake: further increasing exports through Egypt and more extensive use of its liquefaction facilities, or an FLNG (floating gas liquefaction) facility near Leviathan. If the state approves it, NewMed will expand exports.

Meanwhile NewMed is satisfied with the decision of rating agency Moody's to affirm its Ba3 Leviathan bond rating. The rating remains the same, but in the shadow of the war and the increase in geopolitical risk, Moody's cut the rating outlook to negative. NewMed CEO Yossi Abu told Globes, "Despite the war, our activities were not harmed and we met our targets."

Published by Globes, Israel business news - - on February 25, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Leviathan platform  credit: Albatross
Leviathan platform credit: Albatross
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