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Noble Energy – shifting priorities

By Charles Ellinas

Noble Energy was the first oil and gas company to enter Cyprus EEZ in 2008 and made a discovery in 2011 – the Aphrodite gasfield – which opened up Cyprus’ hydrocarbons sector. Unfortunately, its development is still problematic and its promising riches still far from being realised.

In this article, I have described the company, its performance and plans and what these mean for Cyprus. This completes the series of articles on the main oil and gas players shaping Cyprus’ fledgling hydrocarbons sector.

Some vital statistics

The origins of Noble Energy begin in 1932. It became a public company in 1972 and, by 2002, it diversified its business and changed its name to Noble Energy Inc.

During the last 80+ years, Noble Energy evolved into an independent oil and gas exploration and production company, with a diversified portfolio of both US unconventional and global offshore conventional hydrocarbon assets. Its main global operations are in West Africa, in Equatorial Guinea and Cameroon, and in the East Med, in Israel and Cyprus.

Noble’s market capitalisation is currently $17 billion, about 5% of ExxonMobil, and it employs 2,400 people. Its proved reserves at the end of 2016 were just over 1.42 billion barrels of oil equivalent (boe), with an average annual replacement ratio of about 104%. This is despite the fact that its production has been increasing steadily from 213,000 boe/d in 2011 to an estimated 390,000 boe/d end 2016.

However, its performance was hit badly by the low oil price. Its 2015 revenues totalled $3.13 billion, with a net loss of $2.44billion. By the end of the third quarter (Q3) of 2016, its revenues were $2.48 billion and its net loss was $745 million.

As a result, by Q3-2016, it reduced its capital expenditure dramatically to $935 million, in comparison to $2.325 billion a year earlier. Nevertheless, Noble states that it expects to generate an improved and sufficient operating cashflow to fund most of its 2017 capital budget of $2.0 billion-$2.4 billion.

Long-term outlook

On November 16, 2016, Noble presented its ‘Long-term Outlook to 2020’ to investors. Sadly, there was no mention of Cyprus, even though there were extensive references to East Med, Tamar and Leviathan. This, perhaps, reflects the company’s shifting priorities and the lack of visible progress in the development of Aphrodite.
Noble’s outlook priorities are to achieve:

  • Robust growth in oil and total production and cashflow
  • Sanctioning of Leviathan, enabling the company to extend growth
  • Total production is expected to reach between 600,000-700,000 boe/d in 2020, assuming Leviathan start-up in January 2020
  • Fully-funded capital programme, with improving balance-sheet and corporate returns.

Noble has already made a strong start in its US business, with the acquisition mid-January of Clayton Williams Energy for $2.7 billion. This will increase its production by about 50,000 boe/d by 2020. However, this acquisition, combined with loses over the last two years, leaves even less capital to invest in the East Med.

Interests in Israel

Noble started operations in Israel in 1998, but it was not until 2010 that it made its first major discovery Tamar with 10tcf, followed by Leviathan in 2011, with 22tcf gross recoverable natural gas.

Progress in Israel highlighted in Noble’s Q3-2016 report includes:

  • Continued strong operations and reservoir performance at Tamar, with cumulative gas sales reaching 1tcf.
    Tamar is supplying up to 60% of Israel’s power generation
  • Executed agreement to sell 3% working interest in Tamar in early July 2016 for $369 million, implying $12.3 billion gross valuation of Tamar
  • Increased efforts to launch Phase 1A of the Leviathan development.

Also as part of the gas regulatory framework agreed last year, Noble is in the process of selling ownership interest in Tamar, to reduce it to 25% within six years. Noble also plans to generate additional liquidity from 10% farm-down to help fund the development of Leviathan.

The Tamar field sold 252mcf/d of natural gas and generated net pre-tax profit of $318 million for Noble in 2015.

When one compares this to Noble’s net loss of $2.44 billion in 2015, it is clear that its operations in Israel are highly profitable. Gas sales volumes from Tamar increased to 313mcf/d last year, which should lead to even higher profits.

However, despite selling 1.6tcf to Jordan over a 15-year period, no other firm sales of Leviathan gas have been secured; only pledges. As a result, the commitment to achieve FID before the end of 2016 had to be postponed. The situation is not getting any better. Gas sales to Egypt have also receded due to commercial factors, but also with Egypt expecting to become self-sufficient by 2020 and to start LNG exports using its own gas by 2022.

The much talked-about gas pipeline to Turkey also looks doubtful. Discussions will continue in 2017, but will probably be challenging, given Turkey’s strategy to limit dependence on gas and the availability of plentiful, cheap, Russian gas and spot-LNG.

As a result, with gas sales and export options dwindling, development of Phase 1A of Leviathan is expected to continue facing challenges in 2017.

Noble in Cyprus

Aphrodite was discovered in 2011, with an estimated 4tcf of recoverable gross natural gas resources. At the time, Noble had said: “our significant world-class discoveries in the East Med provide an exceptional opportunity to deliver energy security and economic development for Israel and Cyprus”. Sadly, Cyprus has not yet realised such benefits and probably will not do so for quite some time to come.

It is not for lack of trying by Noble. Opportunities to develop Aphrodite came and went. I have covered these extensively in Cyprus Weekly articles over the last two years.

The LNG plant at Vasilikos had its own opportunities in 2012 and 2013. By 2014, it was too late and the opportunity was missed.

Noble proposed mid-2013 to bring a spar-rig from the Gulf of Mexico to Block 12, to develop Aphrodite gas for domestic power generation. This was not taken up, with one of the stated reasons being that Aphrodite gas was reserved for the LNG plant. By December 2013, the offer lapsed.

In December 2013, Noble was proposing exports using marine CNG. But this, too, was not taken up and another opportunity was missed.

After three years of negotiations, and strong political support, gas exports from Cyprus to Egypt are not progressing into firm, signed, gas sales agreements. By 2020, Egypt will have more than enough gas for its own needs and, by 2021-22, it should be in a position to resume LNG exports.

Gas pipelines to Europe through Greece or Turkey, if the Cyprus problem is resolved, are not commercially viable, due to the prevailing low global gas prices.

Export options are becoming limited and are dependent on gas prices going substantially up. This is the challenge.

With global gas prices staying low, probably for the longer term, gas exports from Cyprus will continue facing challenges. Aphrodite risks remaining on the drawing board for a long time.

Noble and its partners, Delek and Shell, submitted a development plan in July 2015. A year and a half later, the government has not progressed this. Without firm gas sales agreements, this risks remaining a plan.

No wonder then, that there is no mention of Cyprus or Aphrodite in Noble’s ‘Long-term Outlook to 2020’, with priorities shifting to US assets.

Dr Charles Ellinas is a non-resident Senior Fellow Eurasian Energy Futures Initiative, Atlantic Council

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