Chevron eyes promising Middle East over the US

By Rahul Vaimal, Associate Editor
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After years of concentrating on US shale, Chevron Corp, the American multinational energy giant, is staking its natural gas future on the Middle East which is a volatile and divided region where energy companies have long stepped cautiously. 

The pivot away from home country the US by Chevron CEO Michael Wirth is backed by a bet that the Middle East is entering an age of stability that will make it suitable for natural gas tapping, as demand for cheaper and cleaner fuel is expected to exceed that for oil.

The latest plan is seeing the company pitch new gas deals in Egypt, Israel, Qatar, while cutting spending on the exploration of American shale.

The strategy is led by the $11.8 billion acquisition of US-based Noble Energy by Mr. Wirth this month, which owns an approximately 40 percent stake in the Leviathan gas field in the Mediterranean Sea off the coast of Israel.

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Michael Wirth
CEO – Chevron

“Five years ago the Eastern Med wasn’t viewed as endowed from a resource standpoint as I think most people would say today. That’s a fundamental shift. There’s not a lot of capital investment required in the near term. At a time when cash flow matters, that’s a very appealing attribute.”

The deal brings an alliance with Israel that has been smoothed by the narrowing of some historical divisions in the region, such as the establishment of formal relations between Israel and the United Arab Emirates in an agreement signed last month.

Mr. Wirth said business and diplomatic relations in the Middle East “are becoming more codified and stronger, which is a development that we believe bodes well for the region.”

According to a senior source at the US firm, Chevron also made a courtesy call about the Noble deal to officials in Saudi Arabia, a key partner in many Chevron oil ventures and a nation with historically strained relations with Israel.

Continuing risks

Yet there are still regional political and security risks that, in recent years have discouraged some businesses. For instance, Syria and Yemen are ravaged with conflicts while arch rivals Saudi Arabia and Iran are waging a legal fight.

Despite these threats, Chevron, which at one point leap-frogged rival ExxonMobil (another US-based oil and gas multinational) in terms of market value this month to be the largest US oil firm, is moving forward with efforts across the region.

In regional fuel supplies, the Leviathan field and others nearby have the potential to become significant factors. Wirth said Chevron could send gas to a liquefied natural gas (LNG) plant in Egypt that could ship the fuel to Europe or Asia.

Growing demand

European and Asian nations have been moving towards gas, solar and wind, and away from coal and nuclear power.

“The reality is you need gas in tandem with renewables,” said Christopher Kalnin, CEO of Banpu Kalnin Ventures, which invests in US shale gas. Asia in particular will remain dependent on imported gas, he said, because it complements solar and wind.

Global gas demand is expected to increase by an average of 1.5 percent per year by 2025, mainly due to increasing purchases by customers in China and India.

By comparison, oil demand could already have peaked at the 100 million barrels per day (bpd) level last year, forecasters claim, and may drop to 91.7 million bpd this year which will be a seven-year low.

Good relations

A third of the world’s oil and one sixth of its natural gas are extracted in the Middle East, which has long attracted the attention of international oil companies. According to Energy data, Chevron produces less oil and gas barrels in the region than other major ones, but it is the only major company that has had a continuous presence in Saudi Arabia for 70 years and has maintained good ties with the region’s governments.

“Chevron is extremely good at what I would call crown jewel government relations, big assets in challenging countries,” said Robin West, a board member of Spanish oil major Repsol and head of Boston Consulting Group’s Center for Energy Impact. “They very quietly work away at things.”

The Noble Deal matches Wirth’s efforts in Qatar, Egypt and Iraq to adjust to a low-cost energy world and expand. It brought nearly 1 billion cubic feet of natural gas reserves to Chevron, ensuring it remained among the top 10 suppliers of gas in the world.

“The size of the opportunity was way beyond the capacity of a company like Noble,” said a former Chevron executive.

The purchase may support Chevron’s bid for a stake in the expansion of Qatar’s LNG production, where, among others, it competes with Exxon, Shell and Total. A tentative agreement was also recently signed by Chevron for oil exploration in southern Iraq.

Wirth cautioned that talks are still ongoing, ‘There is no certainty of any of the outcomes. In the meantime, Wirth has accelerated his cost-cutting at the company’s home country, the US.